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Inflation and the Steeplechase Between Economic Activity Variables

Jaromir Baxa, Miroslav Plašil and Bořek Vašíček (borek.vasicek@ec.europa.eu)

Working Papers from Czech National Bank, Research and Statistics Department

Abstract: A sharp increase in unemployment accompanied by a relatively muted response of inflation during the Great Recession cast further doubts on the validity of the Phillips curve. With the aid of dynamic model averaging (Raftery et al., 2010), this paper aims to highlight that the existence of a systemic relation between real activity and inflation is blurred due to (i) the failure to capture inflationary pressures by means of a single measure of economic activity, and (ii) the existence of a non-linear response of inflation to the driving variable. Based on data for the U.S. and other G7 countries, our results show that the relation between economic activity and inflation is quite sturdy when one allows for more complex assessment of the former. We find that inflation responds to different measures of economic activity across time and space, and no measure of economic activity clearly dominates. The output gap is often outperformed by unemployment-related variables such as the short-term unemployment rate, the unemployment expansion gap, and the unemployment recession gap. Finally, our results confirm a weakening of the inflation–activity relationship (i.e., a flattening of the Phillips curve) in the last decades, which might be attributed to structural changes in the economy and monetary policy, that is robust both across activity measures and across countries.

Keywords: Dynamic model averaging; inflation dynamics; Phillips curve; real economic activity (search for similar items in EconPapers)
JEL-codes: G01 G15 G21 G24 (search for similar items in EconPapers)
Date: 2013-12
References: Add references at CitEc
Citations: View citations in EconPapers (5)

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Journal Article: Inflation and the steeplechase between economic activity variables: evidence for G7 countries (2017) Downloads
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