Abstract:
This paper employs a multivariate dynamic conditional correlation GARCH model, which is developed by Engle (2001, 2002), to detect the timing and nature of changes in the comovement between Iranian output and prices for the periods after Iran–Iraq war , known as imposed war . The results showed that there is a weak correlation between output and prices after imposed war and varies periodically and changes from positive to negative after imposed war and changes from negative to positive again after 2009 crisis in Iran. We conclude that there is a contagion effect of the price index on output. The predominantly negative output-price co-movement suggests that the overall price level was typically countercyclical rather than procyclical. These findings imply the presence of aggregate supply versus aggregate demand shocks and sticky prices. Supply shocks are the main causes of stagflation. To solve the problem of stagflation, governments must adopt policies to push out the aggregate supply curve
Machine summary:
"The Co-movement between Output and Prices: Evidence from Iran Esmaeil Pishbahar, Mohammad Ghahremanzadeh and Mehri Raei Abstract This paper employs a multivariate dynamic conditional correlation GARCH model, which is developed by Engle (2001, 2002), to detect the timing and nature of changes in the comovement between Iranian output and prices for the periods after Iran–Iraq war , known as imposed war .
Recently, several studies (Cooley and Ohanian, 1991; Backus and Kehoe, 1992; Smith, 1992; Fiorito and Kollintzas, 1994; Kim, 1996; Den Haan, 2000; Haslag and Hsu, 2012) have challenged this view by showing that the correlation between detrended output and prices is negative for several countries during the post-war period.
The elements in Dt follow the univariate GARCH(p,q) processes in the following manner: Pi 2 + ∑Qi β h i= 1,2 (2) hit = ωi + ∑p=1 αip εit−p q=1 iq it−q Engle’s (2002) particular DCC(m,n) structure can be written as: Rt = Q∗−1 where QtQ∗−1 M N M (3) N Qt = (1 − ∑ am − ∑ bn )Q̅ + ∑ am (ξt−m ξt−́ m ) + ∑ bn Qt−n m= 1 n=1 m=1 n=1 Where ξt = εit /√hit , which is a vector containing standardized errors; Qt ≡ {qij } is the conditional variance-covariance matrix of the standardized errors with its time-invariant (unconditional) variance-covariance matrix Q̅ obtained ∗ from the first stage of estimation; and Qt square root of the diagonal elements of Qt : is a diagonal matrix containing the ∗ √q11 0 Qt = [ ] 0 √q22 The key element of our interest in Rt is ρ12,t = q12,t /√q11,t q22,t , which represents the conditional correlation between output and prices.
"The comovement between output and prices: Evidence from a dynamic conditional correlation GARCH model", Economics Letters, 91: 110–116."