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Asymmetric Effects of Economic Activity on Inflation: Evidence and Policy Implications

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  • Douglas Laxton

    (International Monetary Fund)

  • Guy Meredith

    (International Monetary Fund)

  • David Rose

    (International Monetary Fund)

Abstract

Data for the G-7 countries strongly support the view that economic activity has a nonlinear effect on inflation, 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 linear model predictions. One implication is that policymakers can raise the average level of output over time by responding promptly to demand shocks, reducing the variance of output around trend.

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Bibliographic Info

Article provided by Palgrave Macmillan in its journal Staff Papers - International Monetary Fund.

Volume (Year): 42 (1995)
Issue (Month): 2 (June)
Pages: 344-374

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Handle: RePEc:pal:imfstp:v:42:y:1995:i:2:p:344-374

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