Causality Links between Consumer and Producer Prices: Some Empirical Evidence

This paper reexamines the relationship between consumer and producer prices in the G7 countries (United States, Canada, Germany, France, Italy, United Kingdom, and Japan), and it improves on the existing literature in two ways. First, it takes into account causality links arising from the transmission mechanism of monetary policy, which are generally overlooked. Second, it employs the causality testing method for unstable systems recently introduced by, which results in standard asymptotics, thereby obtaining valid statistical inference. The empirical results are consistent with the conventional wisdom according to which there is unidirectional causality running from producer to consumer prices, bidirectional causality (or even no significant links) only being found when the causality links reflecting the monetary transmission mechanism are ignored.