Sectoral Price Changes and Output Growth: Supply and Demand in General Equilibrium

Abstract

Price changes and output growth, both at the aggregate and the sectoral level, appear to be negatively correlated. At a basic level, this suggests that sectoral "supply" shocks are more prevalent than sectoral "demand" shocks. However, it is not clear what these sectoral price-output correlations mean once one thinks in terms of general equilibrium. To help us understand the implication of these price-output correlations, this paper examines a multi-sector dynamic general equilibrium model that includes sectoral technology shocks and sectoral demand shocks, as well as aggregate money growth shocks. We show that while a model driven solely by sectoral technology shocks can generate "plausible" price-output correlations, "demand" shocks, particularly sectoral demand shocks, are needed for the model to generate the sectoral price-output correlations observed in the data. We also show that technology shocks do not always look like "supply" shocks. Positive technology shocks to sectors producing goods that are used for investment frequently result in increases in output and prices in other sectors while positive technology shocks to sectors producing goods that are used primarily as intermediate inputs look like supply shocks in other sectors

The relative price effects of monetary shocks

“…Input/output relationships between sectors and the distinction between final use as consumption or as investment may lead to richer relative price relationships. For example, in a multi-sector model characterized by input/output relationships, Balke and Nath (2003) show a positive technology shock in capital goods producing sector can look like a demand shifts in other sectors--price and output rise--while shocks to intermediate goods sectors look more like supply shocks-price falls and output rises.…”

Relative importance of sectoral and aggregate sources of price changes

“…This comovement can be interpreted as 2 Although the Consumer Price Index (CPI) or the Personal Consumption Expenditure (PCE) Implicit Deflator has broader coverage of both goods and services -as opposed to PPI that includes goods onlyand are more important from the monetary policy perspective, the reasons for using PPI in this paper are two-fold: first, to include the prices of capital goods which are not covered in previous studies (for example, Bryan and Cecchetti,1993) that consider consumer prices only. Secondly, previous research (Balke and Nath, 2001) indicates that prices of different types of goods such as consumption goods, capital goods etc., have interestingly different dynamics in terms of the effects of aggregate and sectoral shocks on price changes.…”

“…In a recent study that examines the relationship between sectoral price changes and output growth in the U.S., Balke and Nath (2001) further argue that sector-specific factors such as sectoral technology or sectoral autonomous expenditures, change supply and demand conditions across sectors in such a way that they may cause relative prices to change and these changes can have significant impact on the aggregate price changes.…”

The Cyclical Behavior of Prices and Relative Prices

“…11 11 Balke and Nath (2003) found mostly negative unconditional correlations between changes in prices and output growth from 1947 to 1987 for annual observations of 35 industries that roughly parallel the SIC two‐digit codes. …”