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The lead of output over inflation in sticky price models

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  • Michael T. Kiley

Abstract

Output growth is negatively correlated with inflation, and detrended output is positively correlated with inflation, in the major North American and European economies. In addition, 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. These results reveal that the recent burst of researchers using the partial adjustment model will find a larger role for supply shocks than alternative models of price rigidity.

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Bibliographic Info

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 96-33.

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Date of creation: 1996
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Handle: RePEc:fip:fedgfe:96-33

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Keywords: Inflation (Finance) ; Productivity ; Prices;

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References

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Citations

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Cited by:
  1. Michael T. Kiley, 1997. "Efficiency wages, nominal rigidities, and the cyclical behavior of real wages and marginal cost," Finance and Economics Discussion Series 1997-24, Board of Governors of the Federal Reserve System (U.S.).
  2. Nelson, E., 1998. "Sluggish inflation and optimizing models of the business cycle," Journal of Monetary Economics, Elsevier, vol. 42(2), pages 303-322, July.
  3. Svensson, Lars E O, 1998. "Open-Economy Inflation Targeting," CEPR Discussion Papers 1989, C.E.P.R. Discussion Papers.

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