ASYMMETRIES IN THE CAPACITY-INFLATION TRADE-OFF

Pedro Pablo Alvarez Lois ()

UFAE and IAE Working Papers from Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC)

Abstract: This paper analyzes the joint dynamics of two key macroeconomic variables for the conduct of monetary policy: inflation and the aggregate capacity utilization rate. An econometric procedure useful for estimating dynamic rational expectation models with unobserved components is developed and applied in this context. The method combines the flexibility of the unobserved components approach, based on the Kalman recursion, with the power of the general method of moments estimation procedure. A 'hyb id' Phillips curve relating inflation to the capacity utilization gap and incorporating forward and backward looking components is estimated. The results show that such a relationship in non-linear: the slope of the Phillips curve depends significantly on the magnitude of the capacity gap. These findings provide support for studying the implications of asymmetricmonetary policy rules.

Keywords: Capacity Constraints; Phillips Curve; NAICU Gap; Kalman-GMM Algorithm (search for similar items in EconPapers)
JEL-codes: C32 C52 E52 (search for similar items in EconPapers)
Pages: 24
Date: 2000-10-01
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Citations: View citations in EconPapers (9)

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Persistent link: https://EconPapers.repec.org/RePEc:aub:autbar:470.00

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