Thresholds in the relationship between inflation and economic activity

Pilar Cuadrado and Enrique Moral-Benito

Economic Bulletin, 2016, issue DEC, No 2, 18-23

Abstract: This article analyses the sensitivity of inflation to changes in activity in the Spanish economy. The non-linear approach adopted allows this sensitivity to be estimated for different economic growth regimes. Specifically, the estimates for the period from 1983 to 2015 indicate that this sensitivity is higher in periods in which the output gap is very small (deep recessions) and, above all, in those in which it is abnormally large (upturns with strong economic growth). By contrast, in periods of moderate growth or mild contraction, economic activity, as measured by the output gap, is of limited value as an inflation predictor.

Date: 2016
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