A Long Term View on the Short Term Co-movement of Output and Prices in a Small Open Economy

Abstract

One assumption behind inflation targeting as objective for monetary policy is that inflation rates in the short run to some extent reflect output cycles. The present paper investigates the historical co-movements of output and prices for a small open raw material based economy, in this case Norway 1830 -2006. Looking at contemporaneous movements we find more often negative correlations between the two variables than positive. The correlations do not give any evidence of causality. However, they may indicate that supply side shocks, often caused by the foreign sector, were more important for historical output cycles in Norway than assumed hitherto.

Contributions to a History of Prices in Norway: Monthly Price Indices, 1777-1920

“…86 In a study including Norway in the sample Smith (1992) concludes that the international evidence supports the procyclicality hypothesis prior to WWI. Somewhat different results are obtained by Grytten and Hunnes (2012) in their study based on correlations between annual GDP output gaps and consumer price indices for Norway. Ratio scale rising prices.…”

Challenges for the Construction of Historical Price Indices: The Case of Norway, 1777-1920.

“…38 In a study including Norway in the sample Smith (1992) concludes that the international evidence supports the procyclicality hypothesis prior to WWI. Somewhat different results are obtained by Grytten and Hunnes (2012) in their study based on correlations between annual GDP output gaps and consumer price indices for Norway.…”