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

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  • Douglas Laxton
  • Guy Meredith
  • David Rose

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

Paper provided by International Monetary Fund in its series IMF Working Papers with number 94/139.

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Length: 48
Date of creation: 01 Nov 1994
Date of revision:
Handle: RePEc:imf:imfwpa:94/139

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