Inflation and Activity – Two Explorations and their Monetary Policy Implications

By Olivier J Blanchard, Eugenio M Cerutti, Lawrence Summers

November 6, 2015

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Olivier J Blanchard, Eugenio M Cerutti, and Lawrence Summers. Inflation and Activity – Two Explorations and their Monetary Policy Implications, (USA: International Monetary Fund, 2015) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

We explore two issues triggered by the crisis. First, in most advanced countries, output remains far below the pre-recession trend, suggesting hysteresis. Second, while inflation has decreased, it has decreased less than anticipated, suggesting a breakdown of the relation between inflation and activity. To examine the first, we look at 122 recessions over the past 50 years in 23 countries. We find that a high proportion of them have been followed by lower output or even lower growth. To examine the second, we estimate a Phillips curve relation over the past 50 years for 20 countries. We find that the effect of unemployment on inflation, for given expected inflation, decreased until the early 1990s, but has remained roughly stable since then. We draw implications of our findings for monetary policy.

Subject: Disinflation, Financial crises, Inflation, Oil prices, Output gap, Prices, Production

Keywords: Disinflation, Europe, Hysteresis, Inflation, Inflation expectation, Inflation unemployment relation, Monetary Policy, Oil prices, Output gap, Output trend, Phillips Curve, Recession episode, Recession gap, Recession trend, Recessions, Time trend, Unemployment gap, WP

Publication Details

Pages:

29
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2015/230
Stock No:

WPIEA2015230
ISBN:

9781513536613
ISSN:

1018-5941

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