{
  "title": "Asymmetry in the U.S. Output-Inflation Nexus: Issues and Evidence",
  "publication": "IMF Working Papers, August 1, 1995",
  "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2016/12/30/asymmetry-in-the-u-s-1872",
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  "summary": "This paper presents empirical evidence supporting the proposition that there is a significant asymmetry in the U.S. output-inflation process, which implies that excess demand conditions are much more inflationary than excess supply conditions are disinflationary.",
  "sections": [
    {
      "heading": "Main findings",
      "content": "- Empirical evidence supports a significant asymmetry in the U.S. output-inflation process: excess demand conditions are much more inflationary than excess supply conditions are disinflationary.\n- Because of this asymmetry, allowing the economy to overheat can be very costly: reestablishing inflation control may require a severe tightening in monetary conditions.\n- The small model developed in the paper indicates that large recessions (for example, the 1981-82 recession) can be seeded by prior overheating of the economy.\n- The appropriate measure of excess demand for estimating the Phillips curve cannot have a zero mean; the mean must be negative if inflation is to be stationary.\n- Failure to account for the nonzero (negative) mean of the excess demand measure can lead researchers to be misled into falsely accepting a linear Phillips curve specification."
    },
    {
      "heading": "Model, theory, and implications",
      "content": "- The paper develops a small model of the U.S. output-inflation process that explicitly incorporates asymmetry between excess demand and excess supply effects on inflation.\n- Key theoretical implication: asymmetry implies a nonzero mean for the excess demand measure used in Phillips curve estimation—specifically, a negative mean is required for stationary inflation.\n- Policy implication: asymmetric inflationary response makes overheating particularly costly because restoring price stability requires stronger policy tightening than the disinflationary effect of equivalent negative demand shocks."
    },
    {
      "heading": "Empirical approach and robustness checks",
      "content": "- Empirical results demonstrate robustness of the asymmetry conclusions to:\n  - Changes in the method used to estimate potential output.\n  - Changes in the specification of the Phillips curve.\n- The paper shows that sensitivity analyses support the central finding that asymmetry is a robust feature of the U.S. output-inflation nexus."
    },
    {
      "heading": "Policy recommendations and cautions",
      "content": "- Monetary policy should avoid allowing the economy to overheat because the asymmetric inflationary response raises the cost of subsequent stabilization.\n- Empirical modeling of inflation dynamics should incorporate asymmetry and the implied negative mean of the excess demand measure to avoid misspecification and false acceptance of linear models.\n\n---\n\n\nSource: https://www.imf.org/en/publications/wp/issues/2016/12/30/asymmetry-in-the-u-s-1872"
    }
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    "Authors: Douglas Laxton, Peter B. Clark, David Rose",
    "Published: August 1, 1995",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9781451849813.001",
    "Empirical evidence supports a significant asymmetry in the U.S. output-inflation process: excess demand conditions are much more inflationary than excess supply conditions are disinflationary.",
    "Because of this asymmetry, allowing the economy to overheat can be very costly: reestablishing inflation control may require a severe tightening in monetary conditions.",
    "The small model developed in the paper indicates that large recessions (for example, the 1981-82 recession) can be seeded by prior overheating of the economy.",
    "The appropriate measure of excess demand for estimating the Phillips curve cannot have a zero mean; the mean must be negative if inflation is to be stationary.",
    "Failure to account for the nonzero (negative) mean of the excess demand measure can lead researchers to be misled into falsely accepting a linear Phillips curve specification.",
    "The paper develops a small model of the U.S. output-inflation process that explicitly incorporates asymmetry between excess demand and excess supply effects on inflation.",
    "Key theoretical implication: asymmetry implies a nonzero mean for the excess demand measure used in Phillips curve estimation—specifically, a negative mean is required for stationary inflation.",
    "Policy implication: asymmetric inflationary response makes overheating particularly costly because restoring price stability requires stronger policy tightening than the disinflationary effect of equivalent negative demand shocks.",
    "Empirical results demonstrate robustness of the asymmetry conclusions to:",
    "The paper shows that sensitivity analyses support the central finding that asymmetry is a robust feature of the U.S. output-inflation nexus.",
    "Monetary policy should avoid allowing the economy to overheat because the asymmetric inflationary response raises the cost of subsequent stabilization.",
    "Empirical modeling of inflation dynamics should incorporate asymmetry and the implied negative mean of the excess demand measure to avoid misspecification and false acceptance of linear models."
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