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The Possible Unemployment Cost of Average Inflation below a Credible Target

Lars Svensson ()

No 19442, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: If inflation expectations become firmly anchored at the inflation target even when average inflation deviates from the target, the long-run Phillips curve becomes non-vertical. During 1997-2011, average inflation expectations in Sweden have been close to the inflation target of 2 percent, whereas average inflation has fallen short of the target by 0.6 percentage points. The estimates reported suggest that the slope of the long-run Phillips curve is about 0.75. Then the average unemployment rate has been about 0.8 percentage points higher than if average inflation had been on target. This is a large unemployment cost of undershooting the inflation target.

JEL-codes: E24 E31 E52 E58 (search for similar items in EconPapers)
Date: 2013-09
Note: IFM ME
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Published as The Possible Unemployment Cost of Average Inflation below a Credible Target , Lars E. O. Svensson. in Lessons from the Financial Crisis for Monetary Policy , Gertler. 2015
Published as Lars E. O. Svensson, 2015. "The Possible Unemployment Cost of Average Inflation below a Credible Target," American Economic Journal: Macroeconomics, American Economic Association, vol. 7(1), pages 258-96, January.

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Journal Article: The Possible Unemployment Cost of Average Inflation below a Credible Target (2015) Downloads
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