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The lead of output over inflation in sticky price models

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  • Michael Kiley

    ()
    (Federal Reserve Board and OECD)

Abstract

Output growth is negatively correlated with inflation, detrended output is positively correlated with inflation, and 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. The imperfect information aspects of staggered price setting and the P-bar model drive some of the output/inflation nexus, highlighting a link with the tradition from Hume to Lucas to recent work by Mankiw and Reis.

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Bibliographic Info

Article provided by AccessEcon in its journal Economics Bulletin.

Volume (Year): 5 (2002)
Issue (Month): 5 ()
Pages: 1-7

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Handle: RePEc:ebl:ecbull:eb-02e00004

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Cited by:
  1. Kiley, Michael T., 1997. "Efficiency wages, nominal rigidities and the cyclical behavior of real wages and marginal cost," Economics Letters, Elsevier, vol. 56(2), pages 215-221, October.
  2. Svensson, Lars E O, 1998. "Open-Economy Inflation Targeting," CEPR Discussion Papers 1989, C.E.P.R. Discussion Papers.
  3. Nelson, E., 1998. "Sluggish inflation and optimizing models of the business cycle," Journal of Monetary Economics, Elsevier, vol. 42(2), pages 303-322, July.

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