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Why Is Inflation Low When Productivity Growth Is High?

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  • Michael T. Kiley

Abstract

Inflation has been low when productivity growth has been high. This occurs because the Federal Reserve has not adjusted nominal income growth in response to changes in productivity growth, implying that an acceleration in trend productivity growth leads to a deceleration in inflation. The model's predictions are confirmed: (1) Inflation should fall when trend productivity growth rises, and (2) nominal income and wage growth should not change with trend productivity. The model also implies that productivity growth enters a Phillips curve relationship as a proxy for inflation expectations. Thus, estimates of the NAIRU should fall when productivity growth accelerates. (JEL E31, E50, E52) Copyright 2003, Oxford University Press.

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Bibliographic Info

Article provided by Western Economic Association International in its journal Economic Inquiry.

Volume (Year): 41 (2003)
Issue (Month): 3 (July)
Pages: 392-406

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Handle: RePEc:oup:ecinqu:v:41:y:2003:i:3:p:392-406

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Cited by:
  1. William T. Gavin & Benjamin D. Keen & Alexander W. Richter & Nathaniel A. Throckmorton, 2013. "Global Dynamics at the Zero Lower Bound," Auburn Economics Working Paper Series auwp2013-17, Department of Economics, Auburn University.
  2. Meijers, Huub, 2006. "Diffusion of the Internet and low inflation in the information economy," Information Economics and Policy, Elsevier, vol. 18(1), pages 1-23, March.
  3. Christian Pierdzioch & Jan-Christoph Rülke & Peter Tillmann, 2013. "Using forecasts to uncover the loss function of FOMC members," MAGKS Papers on Economics 201302, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
  4. Tesfaselassie, Mewael F., 2014. "Trend growth and learning about monetary policy rules," Journal of Economic Dynamics and Control, Elsevier, vol. 41(C), pages 241-256.

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