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 tosome extent reflect output cycles. The present paper investigates the historical co-movements of output and pricesfor a small open raw material based economy, in this case Norway 1830 – 2006. Looking at contemporaneousmovements we find more often negative correlations between the two variables than positive. The correlations donot give any evidence of causality. However, they may indicate that supply side shocks, often caused by the foreignsector, were more important for historical output cycles in Norway than assumed hitherto
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