²⁰Price volatility is robustly negatively correlated with real consumption growth in all sample countries—this relationship is known among business cycle forecasters as the ‘Katona Effect’; see, e.g., Okun (1981), p. 216. In economic terms, periods of above-average price volatility tend to be associated with shocks that may also have an impact on permanent income. This instrument is attractive because it can be readily calculated for any country and it is unlikely to be correlated with measurement error in consumption growth. The variable appears to be used in the professional forecasting community but is not as common in academic work. Price volatility at time $t$ , $P Vt$ , is calculated as the coefficient of variation over the past four quarters: $VtP= σPt-3,t∕μPt-3,t,$ where $∘ ----∑---------------- σPt-3,t = 1∕4× 3i=0(Pt-i- μPt-3,t)2$ is the standard deviation of price level between quarters $t- 3$ and $t$ and $∑ μPt-3,t = 1∕4× 3i=0Pt-i$ denotes the mean of price level $P$ between quarters $t- 3$ and $t$ . To calculate price volatility we use quarterly data on consumption (PCE) deflator.