The objective of the paper is to test the hypothesis that the structure of the economy is recursive with disturbances flowing from income to prices, but not back to income. Under this hypothesis, inflation shocks result in corresponding changes in output of the opposite sign. Tests are based on analysis of the vector stochastic process of GNP, the price deflator, and real GNP for the United States from 1954 to 1970. The results are consistent with the recursive structure hypothesis and would seem to reinforce evidence that stock prices and real interest rates vary inversely with inflation.

The objective of the paper is to test the hypothesis that the structure of the economy is recursive with disturbances flowing from income to prices, but not back to income. Under this hypothesis, inflation shocks result in corresponding changes in output of the opposite sign. Tests are based on analysis of the vector stochastic process of GNP, the price deflator, and real GNP for the United States from 1954 to 1970. The results are consistent with the recursive structure hypothesis and would seem to reinforce evidence that stock prices and real interest rates vary inversely with inflation.