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Is there an inflation puzzle?

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Author Info
Cara S. Lown
Robert W. Rich

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Abstract

This paper investigates the issue of an "inflation puzzle", or the lack of an acceleration in inflation during the current expansion. Our findings indicate that while inflation has appeared to be unusually low, we can account for this feature of the data over most of the current expansion. In particular, the results support the view that the weak increase in compensation growth during the period 1992-94 was a major contributor to the low level of inflation observed through late 1995. ; More recently, however, there is evidence of an anomaly in the behavior of inflation. The out-of-sample forecasts from our price-inflation Phillips curve have been subject to over-predication errors for the last seven quarters. In addition, the forecasts from our estimated wage-inflation Phillips curve have closely tracked the movements in compensation growth over the last two years. These findings suggest that the appearance of an inflation puzzle can not be fully explained by either reduced growth in benefit costs or unusually slow wage growth.

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Paper provided by Federal Reserve Bank of New York in its series Research Paper with number 9723.

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Date of creation: 1997
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Handle: RePEc:fip:fednrp:9723

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Keywords: Inflation (Finance) Wages Cafeteria benefit plans

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Olivier J. Blanchard, 1984. "The Lucas Critique and the Volcker Deflation," NBER Working Papers 1326, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. Hamilton, James D., 1996. "This is what happened to the oil price-macroeconomy relationship," Journal of Monetary Economics, Elsevier, vol. 38(2), pages 215-220, October. [Downloadable!] (restricted)
    Other versions:
  3. King, Robert G. & Watson, Mark W., 1994. "The post-war U.S. phillips curve: a revisionist econometric history," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 41, pages 157-219, December. [Downloadable!] (restricted)
    Other versions:
  4. Jeffrey C. Fuhrer, 1995. "The Phillips curve is alive and well," New England Economic Review, Federal Reserve Bank of Boston, issue Mar, pages 41-56. [Downloadable!]
  5. Hooker, Mark A., 1996. "What happened to the oil price-macroeconomy relationship?," Journal of Monetary Economics, Elsevier, vol. 38(2), pages 195-213, October. [Downloadable!] (restricted)
  6. Cara S. Lown & Robert W. Rich, 1997. "Is there an inflation puzzle?," Research Paper 9723, Federal Reserve Bank of New York. [Downloadable!]
    Other versions:
  7. Mork, Knut Anton, 1989. "Oil and Macroeconomy When Prices Go Up and Down: An Extension of Hamilton's Results," Journal of Political Economy, University of Chicago Press, vol. 97(3), pages 740-44, June. [Downloadable!] (restricted)
  8. Robert J. Gordon, 1970. "The Recent Acceleration of Inflation and Its Lessons for the Future," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 1(1970-1), pages 8-47. [Downloadable!]
  9. Robert G. King & James H. Stock & Mark W. Watson, 1995. "Temporal instability of the unemployment-inflation relationship," Economic Perspectives, Federal Reserve Bank of Chicago, issue May, pages 2-12.
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Kevin Ross & Angel J. Ubide, 2001. "Mind the Gap: What is the Best Measure of Slack in the Euro Area?," IMF Working Papers 01/203, International Monetary Fund.
  2. Galí, Jordi & Gertler, Mark, 1999. "Inflation Dynamics: A Structural Economic Analysis," CEPR Discussion Papers 2246, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  3. Ieva Rubene & Paolo Guarda, 2004. "The New Keynesian Phillips Curve: Empirical Results For Luxembourg," BCL working papers cahier_etude_11, Central Bank of Luxembourg. [Downloadable!]
  4. Paloviita , Maritta & Mayes , David, 2004. "The use of real time information in Phillips curve relationships for the euro area," Research Discussion Papers 16/2004, Bank of Finland. [Downloadable!]
    Other versions:
  5. Ewald Nowotny, 1999. "The Role of Macroeconomic Policy in Overcoming Slow Economic Growth - International Comparisons and Policy Perspectives," Working Papers geewp01, Vienna University of Economics and B.A. Research Group: Growth and Employment in Europe: Sustainability and Competitiveness. [Downloadable!]
  6. Higo, Masahiro & Nakada, Sachiko-Kuroda, 1999. "What Determines the Relation between the Output Gap and Inflation ? An International Comparison of Inflation Expectations and Staggered Wage Adjustment," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 17(3), pages 129-55, December. [Downloadable!]
  7. Robert W. Rich & Donald Rissmiller, 2001. "Structural change in U.S. wage determination," Staff Reports 117, Federal Reserve Bank of New York. [Downloadable!]
  8. Maritta Paloviita, 2004. "Inflation dynamics in the euro area and the role of expectations," Macroeconomics 0405015, EconWPA. [Downloadable!]
  9. Mark A. Hooker, 1999. "Are oil shocks inflationary? Asymmetric and nonlinear specifications versus changes in regime," Finance and Economics Discussion Series 1999-65, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  10. Jordi Gali & Mark Gertler, 2000. "Inflation Dynamics: A Structural Econometric Analysis," NBER Working Papers 7551, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  11. Cara S. Lown & Robert W. Rich, 1997. "Is there an inflation puzzle?," Economic Policy Review, Federal Reserve Bank of New York, issue Dec, pages 51-77. [Downloadable!]
    Other versions:
  12. Todd E. Clark & Michael W. McCracken, 2003. "The predictive content of the output gap for inflation : resolving in-sample and out-of-sample evidence," Research Working Paper RWP 03-06, Federal Reserve Bank of Kansas City. [Downloadable!]
    Other versions:
  13. Doyle, Matthew, 2006. "Empirical Phillips Curves in OECD Countries: Has There Been A Common Breakdown?," Staff General Research Papers 12684, Iowa State University, Department of Economics. [Downloadable!]
  14. W. Bolt & P.J.A. van Els, 2000. "Output Gap and Inflation in the EU," DNB Staff Reports (discontinued) 44, Netherlands Central Bank. [Downloadable!]
    Other versions:
  15. Robert W. Rich & Donald Rissmiller, 2000. "Understanding the recent behavior of U.S. inflation," Current Issues in Economics and Finance, Federal Reserve Bank of New York, issue Jul. [Downloadable!]
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