Asymmetric Effects of Economic Activityon Inflation: Evidence and Policy Implications

Douglas Laxton, Guy Meredith and David Rose

No 1994/139, IMF Working Papers from International Monetary Fund

Abstract: This paper examines the evidence on asymmetries in the effects of activity on inflation. Data for the G-7 countries are found to strongly support the view that the inflation-activity relationship is nonlinear, with high levels of activity raising inflation by more than low levels decrease it. In the face of such asymmetries, the average level of output in an economy subject to demand shocks will be below the level of output at which there is no tendency for inflation to rise or fall, contrary to the implications of linear models. One implication of these results is that policymakers can raise the average level of output over time by responding promptly to demand shocks, thus reducing the variance of output around trend.

Keywords: WP; aggregate demand; monetary policy; Phillips curve; excess demand; real GDP; output-inflation tradeoff; inflation expectation; output-inflation relationship; Inflation; Output gap; Short term interest rates; Real interest rates; Potential output (search for similar items in EconPapers)
Pages: 48
Date: 1994-11-01
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Citations: View citations in EconPapers (20)

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Journal Article: Asymmetric Effects of Economic Activity on Inflation: Evidence and Policy Implications (1995)
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