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The Possible Unemployment Cost of Average Inflation below a Credible Target

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  • Lars E.O. Svensson

Abstract

If inflation expectations become firmly anchored at the inflation target even when average inflation deviates from the target, the long-run Phillips curve becomes non-vertical. During 1997-2011, average inflation expectations in Sweden have been close to the inflation target of 2 percent, whereas average inflation has fallen short of the target by 0.6 percentage points. The estimates reported suggest that the slope of the long-run Phillips curve is about 0.75. Then the average unemployment rate has been about 0.8 percentage points higher than if average inflation had been on target. This is a large unemployment cost of undershooting the inflation target.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 19442.

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Date of creation: Sep 2013
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Handle: RePEc:nbr:nberwo:19442

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  1. Glenn D. Rudebusch & Lars E. O. Svensson, 1998. "Policy rules for inflation targeting," Proceedings, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco, issue Mar.
  2. Svensson, Lars E. O., 1997. "Inflation forecast targeting: Implementing and monitoring inflation targets," European Economic Review, Elsevier, vol. 41(6), pages 1111-1146, June.
  3. Per Lundborg & Hans Sacklén, 2006. "Low-inflation Targeting and Long-run Unemployment," Scandinavian Journal of Economics, Wiley Blackwell, vol. 108(3), pages 397-418, October.
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Cited by:
  1. Andersson, Fredrik N. G. & Jonung, Lars, 2014. "The Return of the Original Phillips curve? An Assessment of Lars E. O. Svensson's Critique of the Riksbank's Inflation Targeting, 1997-2012," Working Papers 2014:28, Lund University, Department of Economics.
  2. Christian Friedrich, 2014. "Global Inflation Dynamics in the Post-Crisis Period: What Explains the Twin Puzzle?," Working Papers 14-36, Bank of Canada.

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