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An empirical analysis of inflation in OECD countries

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  • Jane Ihrig
  • Jaime Marquez
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    Abstract

    One of the most remarkable macroeconomic developments of the past decade has been the widespread decline in inflation despite declines in unemployment rates. For the United States, these seemingly contradictory developments have been reconciled in terms of three factors: (1) an acceleration in productivity, (2) structural changes in labor markets that lowered the natural unemployment rate (NAIRU), and (3) improved credibility of monetary policy. Here we ask whether comparable factors were at work in foreign industrial countries. To address this question, we empirically characterize the relationship between inflation, the unemployment rate, and structural factors using an extended Phillips curve model with quarterly data through 1994. By undertaking counterfactual simulations from 1995 to 2001, we quantify the separate contributions of unemployment-rate movements, labor-market reforms (that affected the NAIRU), and productivity developments on inflation. In line with previous work on the United States, we find that productivity advancements were the main structural factor reducing inflation in the United States. For foreign countries, persistent labor-market slack was the main factor exerting downward pressure on inflation. This persistence stemmed, in part, from structural reforms that lowered the NAIRU while the unemployment rate was declining.

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    Bibliographic Info

    Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 765.

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    Date of creation: 2003
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    Handle: RePEc:fip:fedgif:765

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    Related research

    Keywords: Inflation (Finance) ; Unemployment;

    References

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    1. Laurence Ball & N. Gregory Mankiw, 2002. "The NAIRU in Theory and Practice," Journal of Economic Perspectives, American Economic Association, vol. 16(4), pages 115-136, Fall.
    2. Christopher Gust & Jaime Marquez, 2000. "Productivity developments abroad," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Oct, pages 665-681.
    3. David Gruen & Adrian Pagan & Christopher Thompson, 1999. "The Phillips Curve in Australia," RBA Research Discussion Papers rdp1999-01, Reserve Bank of Australia.
    4. Laurence Ball & Robert Moffitt, 2001. "Productivity Growth and the Phillips Curve," NBER Working Papers 8421, National Bureau of Economic Research, Inc.
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    Cited by:
    1. Steven B. Kamin & Mario Marazzi & John W. Schindler, 2004. "Is China "exporting deflation"?," International Finance Discussion Papers 791, Board of Governors of the Federal Reserve System (U.S.).
    2. Preston J. Miller & Gary H. Stern, 2004. "Avoiding significant monetary policy mistakes," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Dec, pages 2-9.
    3. Ivan Kitov, 2007. "Inflation, Unemployment, Labor Force Change in European Counties," Mechonomics mechonomics7, Socionet.
    4. Daniels, Joseph P. & VanHoose, David D., 2009. "Openness, income-tax progressivity, and inflation," Journal of Macroeconomics, Elsevier, vol. 31(3), pages 485-491, September.
    5. Francisco Rosende, 2003. "Conducción de la Política Monetaria," Documentos de Trabajo 247, Instituto de Economia. Pontificia Universidad Católica de Chile..
    6. Joseph P. Daniels & Farrokh Nourzad & David D. VanHoose, 2005. "Openness, Centralized Wage Bargaining, and Inflation," Working Papers and Research 0505, Marquette University, Center for Global and Economic Studies and Department of Economics.
    7. Francisco Rosende R., 2004. "El marco teórico de la política monetaria," Revista de Analisis Economico – Economic Analysis Review, Ilades-Georgetown University, Universidad Alberto Hurtado/School of Economics and Bussines, vol. 19(2), pages 85-117, December.

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