Asymmetric Effects of Economic Activityon Inflation: Evidence and Policy Implications

By Douglas Laxton, Guy M Meredith, David Rose

November 1, 1994

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Douglas Laxton, Guy M Meredith, and David Rose. Asymmetric Effects of Economic Activityon Inflation: Evidence and Policy Implications, (USA: International Monetary Fund, 1994) accessed December 22, 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

This paper examines the evidence on asymmetries in the effects of activity on inflation. Data for the G-7 countries are found to strongly support the view that the inflation-activity relationship is nonlinear, with high levels of activity raising inflation by more than low levels decrease it. In the face of such asymmetries, the average level of output in an economy subject to demand shocks will be below the level of output at which there is no tendency for inflation to rise or fall, contrary to the implications of linear models. One implication of these results is that policymakers can raise the average level of output over time by responding promptly to demand shocks, thus reducing the variance of output around trend.

Subject: Deflation, Financial services, Inflation, Output gap, Potential output, Prices, Production, Real interest rates, Short term interest rates

Keywords: Aggregate demand, Excess demand, Inflation, Inflation expectation, Monetary policy, Output gap, Output-inflation relationship, Output-inflation tradeoff, Phillips curve, Potential output, Real GDP, Real interest rates, Short term interest rates, WP

Publication Details

Pages:

48
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 1994/139
Stock No:

WPIEA1391994
ISBN:

9781451929355
ISSN:

1018-5941

Notes

Also published in Staff Papers, Vol. 42, No. 2, June 1995.

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