Do prices reflect short-term output fluctuations? : empirical evidence from a small open raw material based economy

Abstract

Within the framework of Keynesian economic theory it is widely taken for granted that short term output fluctuations are mirrored in corresponding fluctuations in prices. By examining data on prices and output for a small open raw material based economy, in this case Norway, 1830-2006, this paper concludes that there isn't a clear positive correlation between prices and output. Contrary, there is more evidence of a counter-cyclical relationship, indicating that business cycles are more frequently caused by supply-side shocks than demand side shocks. However, negative demand shocks normally seem to cause lagged negative price responses.