Inflation and Activity – Two Explorations and their Monetary Policy Implications
IMF Working Papers, November 6, 2015
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- Inflation and Activity – Two Explorations and their Monetary Policy Implications
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Bibliographic details
- Authors: Olivier J Blanchard, Eugenio M Cerutti, Lawrence Summers
- Published: November 6, 2015
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513536613.001
Authors and publication
- By Olivier J Blanchard, Eugenio M Cerutti, Lawrence Summers
- November 6, 2015
- IMF Working Papers, Working Paper No. 2015/230
- Pages: 29; Volume: 2015; Issue: 230; DOI: https://doi.org/10.5089/9781513536613.001
- Stock No: WPIEA2015230; ISBN: 9781513536613; ISSN: 1018-5941
Research questions and scope
- Two main issues explored:
- Persistent shortfall of output in most advanced countries after the crisis, suggesting hysteresis.
- Inflation declined after the crisis but by less than anticipated, suggesting a breakdown of the relation between inflation and activity.
- Empirical coverage:
- 122 recessions over the past 50 years in 23 countries (analysis of output dynamics and hysteresis).
- Phillips curve estimation over the past 50 years for 20 countries (analysis of the inflation–unemployment relation).
Key empirical findings
- Output and hysteresis:
- A high proportion of the 122 recessions examined have been followed by lower output or even lower growth relative to pre-recession trends.
- Inflation–activity relation (Phillips curve):
- The effect of unemployment on inflation, for given expected inflation, decreased until the early 1990s.
- Since the early 1990s, that effect has remained roughly stable.
- Overall pattern:
- Inflation has decreased following the crisis, but the decline has been smaller than anticipated given activity shortfalls.
Policy implications (as drawn in the paper)
- Monetary policy implications are discussed based on the twin findings of persistent output shortfalls (hysteresis) and a weakened but stable post-1990s unemployment–inflation tradeoff.
- Implications focus on how the observed dynamics of output and the Phillips curve should inform the conduct of monetary policy in advanced economies (details and specific recommendations are presented in the working paper).
Subjects and keywords
- Subject: Disinflation, Financial crises, Inflation, Oil prices, Output gap, Prices, Production
- Keywords: Disinflation, Europe, Hysteresis, Inflation, inflation expectation, inflation unemployment relation, Monetary Policy, Oil prices, Output gap, output trend, Phillips Curve, recession episode, recession gap, recession trend, Recessions, time trend, unemployment gap, WP
Source: IMF Working Paper "Inflation and Activity – Two Explorations and their Monetary Policy Implications" (Working Paper No. 2015/230, November 6, 2015) by Olivier J Blanchard, Eugenio M Cerutti, Lawrence Summers.
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