Nominal Income and the Inflation-Growth Divide
IMF Working Papers, November 1, 1997
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Bibliographic details
- Authors: Sheetal K. Chand
- Published: November 1, 1997
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451856699.001
Summary
- This paper deals with aggregate demand fluctuations and their price and output effects.
- Starting with a nominal income solution, a rule for determining the inflation and output growth effects is presented.
- Assigning alternative values to the key parameters of the suggested rule generates different closure rules, such as the classical and the Keynesian and their modern counterparts.
- An application to major industrial country data indicates that the suggested rule is robust.
- Both inflation and output growth are affected by nominal shocks, but response patterns vary among the countries.
Analytical framework
- Proposes a nominal income solution as the starting point.
- Derives a rule to determine how nominal shocks translate into inflation effects and output growth effects.
- Demonstrates that varying key parameter values in the rule yields alternative closure rules (explicitly including classical and Keynesian frameworks and their modern counterparts).
Empirical application
- Applies the suggested rule to major industrial country data.
- Finds robustness of the rule across the applied sample.
- Documents cross-country variation: while both inflation and output growth respond to nominal shocks, the response patterns differ among countries.
Key findings and implications
- Nominal shocks influence both inflation and output growth.
- The mapping from nominal income fluctuations to inflation versus real output depends on the closure rule implied by parameter choices.
- Alternative parameterizations produce closure rules consistent with classical, Keynesian, and modern variants, implying policy conclusions depend on the underlying closure assumption.
- Cross-country heterogeneity in response patterns implies that empirical calibration of the rule matters for country-specific policy analysis.
Subjects and keywords
- Subjects: Inflation, Labor, National accounts, Personal income, Potential output, Prices, Production, Production growth, Wages
- Keywords: cross-equation restriction, G-7 countries, growth equation, growth rate, growth solution, income growth, inflation, inflation effect, inflation rate, macroeconomic analysis, nominal income, output, Personal income, Phillips curve, Potential output, Production growth, rate of inflation, Wages, WP
Nominal Income and the Inflation-Growth Divide — IMF Working Paper No. 1997/147.
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- Nominal Income and the Inflation-Growth Divide - WP/97/147