Asymmetric Effects of Economic Activityon Inflation: Evidence and Policy Implications

Author/Editor:

Douglas Laxton ; Guy M Meredith ; David Rose

Publication Date:

November 1, 1994

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.

Series:

Working Paper No. 1994/139

Subject:

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

Notes:

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

English

Publication Date:

November 1, 1994

ISBN/ISSN:

9781451929355/1018-5941

Stock No:

WPIEA1391994

Pages:

48

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