The lead of output over inflation in sticky price models

Michael Kiley

No 96-33, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: Output growth is negatively correlated with inflation, and detrended output is positively correlated with inflation, in the major North American and European economies. In addition, output growth and detrended output lead inflation. I explore the consistency of these correlations with three models of price adjustment: the partial adjustment model, a staggered price setting model, and the P-bar model. The ratio of the variance of supply to demand shocks necessary to match the pattern of output- inflation correlations can be ranked across the three models; the P-Bar model requires the lowest ratio, and the partial adjustment model requires the highest ratio. These results reveal that the recent burst of researchers using the partial adjustment model will find a larger role for supply shocks than alternative models of price rigidity.

Keywords: Inflation (Finance); Productivity; Prices (search for similar items in EconPapers)
Date: 1996
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Citations: View citations in EconPapers (4)

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Related works:
Working Paper: The Lead of Output over Inflation in Sticky Price Models (2019)
Journal Article: The lead of output over inflation in sticky price models (2002)
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