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Empirical studies of structural changes and inflation


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  • Bank for International Settlements
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    During the 1990s, a number of countries successfully achieved low and stable inflation. Part of the decline reflects the large and negative output gaps in the early 1990s and favourable supply shocks later in the decade. However, inflation has remained relatively subdued as economic conditions have strengthened and some of the supply shocks have reversed. Moreover, actual inflation has remained well below the rates forecast by models based on historical data. This raises the issue of whether the inflation process has undergone structural changes and, if so, which have been the principal forces. There are several plausible reasons why such changes could have occurred. First, due to globalisation and increasing competition in both domestic and international markets, firms' pricing power may have been eroded. Put another way, prices have become more sticky or the inflation process has become more persistent. One result of such changes is that the pass-through of cost increases (including exchange rate changes) into prices has fallen. Moreover, when relative prices evolve more slowly, firms that are subject to menu costs will set prices for longer periods. Second, with inflation in the 1-3% range for some time, inflation expectations may have become more firmly anchored, particularly if the public believes that the monetary authorities will successfully resist any persistent movements of inflation away from this level. This is likely to be the case as many countries have explicitly adopted price stability as the overriding target for monetary policy. Third, increases in productivity growth may have raised the rates at which economies can grow without encountering inflationary pressures. To some extent, this change may appear as a decline in the sensitivity of inflation to measures of the output gap, which tends to be overestimated in such conditions. Another measurement or estimation problem is that higher productivity growth may be an endogenous response to increasing competition and firms' loss of pricing power. To explore these issues further, economists from nine central banks were invited to a workshop, chaired by Lars Heikensten, First Deputy Governor of Sveriges Riksbank, and held at the BIS on 31 October 2000. The papers presented at the workshop and reproduced on the following pages covered various approaches to the issues raised above. While there was a consensus that most of the structural changes involved technological progress and productivity growth, the empirical evidence is not yet firm enough to draw clear lessons for monetary policy.

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    Bibliographic Info

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    This book is provided by Bank for International Settlements in its series BIS Papers with number 03 and published in 2001.

    ISBN: 92-9131-616-4
    Handle: RePEc:bis:bisbps:03

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    1. David Gruen & Adrian Pagan & Christopher Thompson, 1999. "The Phillips Curve in Australia," RBA Research Discussion Papers, Reserve Bank of Australia rdp1999-01, Reserve Bank of Australia.
    2. Wallis, Kenneth F, 1989. "Macroeconomic Forecasting: A Survey," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 99(394), pages 28-61, March.
    3. Flint Brayton & John M. Roberts & John C. Williams, 1999. "What's happened to the Phillips curve?," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 1999-49, Board of Governors of the Federal Reserve System (U.S.).
    4. George A. Akerlof & William T. Dickens & George L. Perry, 2000. "Near-Rational Wage and Price Setting and the Long-Run Phillips Curve," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 31(1), pages 1-60.
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    Cited by:
    1. Claudio E. V. Borio & Wiliam English & Andrew Filardo, 2003. "A tale of two perspectives: old or new challenges for monetary policy?," BIS Working Papers 127, Bank for International Settlements.
    2. Samuel Bentolila & Juan J. Dolado & Juan F. Jimeno, 2007. "Does Immigration Affect The Phillips Curve? Some Evidence For Spain," Working Papers, CEMFI wp2007_0718, CEMFI.
    3. Stefan Gerlach & Matthew S. Yiu, 2002. "Unobservable-Component Estimates of Output Gaps in Five Asian Economies," Working Papers 052002, Hong Kong Institute for Monetary Research.
    4. Luis Fernando Melo & Martha Misas A., . "Modelos Estructurales de Inflación en Colombia: Estimación a Través de Mínimos Cuadrados Flexibles," Borradores de Economia 283, Banco de la Republica de Colombia.
    5. Karanassou, Marika & Sala, Hector & Snower, Dennis J., 2008. "Long-run inflation-unemployment dynamics: The Spanish Phillips curve and economic policy," Journal of Policy Modeling, Elsevier, Elsevier, vol. 30(2), pages 279-300.


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