Inflation and Activity – Two Explorations and their Monetary Policy Implications

Author/Editor:

Olivier J Blanchard ; Eugenio M Cerutti ; Lawrence Summers

Publication Date:

November 6, 2015

Electronic Access:

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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.

Series:

Working Paper No. 15/230

Notes:

Statistical Appendix

English

Publication Date:

November 6, 2015

ISBN/ISSN:

9781513536613/1018-5941

Stock No:

WPIEA2015230

Price:

$18.00 (Academic Rate:$18.00)

Format:

Paper

Pages:

29

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