The Pre- and Postwar Price–Output Paradox Revisited

This article addresses past findings of a change in the sign of the price–output correlation in the pre– and post–World War II eras. This “paradox” can be resolved by taking into account the changing direction of price movements, deflation to inflation, during the two time periods. There is, in fact, a consistently negative correlation between the absolute value of price level changes and changes in output in both time periods and throughout the entire sample. This finding offers empirical support to economic theories espousing the benefits of price stability.