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The inflation-output trade-off: Is the Phillips Curve symmetric? A policy lesson from New Zealand

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Abstract

New Zealand data show that the inflation-output relationship is asymmetric. This asymmetry implies that positive demand shocks tend to increase inflation by more than negative demand shocks of similar magnitudes reduce it. An important implication of this asymmetry is that a monetary authority with the objective of maintaining the inflation rate within a narrow band needs to react more promptly to demand shocks than otherwise be necessary. Alternatively, policy that is slow to respond to demand disturbances will result in higher inflation, and greater losses of output than would be the case with a linear Phillips curve.

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File URL: http://www.rbnz.govt.nz/research_and_publications/discussion_papers/1997/g97_2.pdf
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Paper provided by Reserve Bank of New Zealand in its series Reserve Bank of New Zealand Discussion Paper Series with number G97/2.

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Length: 25p
Date of creation: Jan 1997
Date of revision:
Handle: RePEc:nzb:nzbdps:1997/02

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  1. Svensson, Lars E.O., 1997. "Inflation Forecast Targeting: Implementing and Monitoring Inflation Targets," Seminar Papers 615, Stockholm University, Institute for International Economic Studies.
  2. Hall, Alastair R & Rudebusch, Glenn D & Wilcox, David W, 1996. "Judging Instrument Relevance in Instrumental Variables Estimation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 37(2), pages 283-98, May.
  3. Ball, Laurence & Mankiw, N Gregory, 1994. "Asymmetric Price Adjustment and Economic Fluctuations," Economic Journal, Royal Economic Society, vol. 104(423), pages 247-61, March.
  4. Jeffrey C. Fuhrer, 1995. "The persistence of inflation and the cost of disinflation," New England Economic Review, Federal Reserve Bank of Boston, issue Jan, pages 3-16.
  5. Peter Clark & Douglas Laxton & David Rose, 1996. "Asymmetry in the U.S. Output-Inflation Nexus," IMF Staff Papers, Palgrave Macmillan, vol. 43(1), pages 216-251, March.
  6. Douglas Laxton & Guy Meredith & David Rose, 1995. "Asymmetric Effects of Economic Activity on Inflation: Evidence and Policy Implications," IMF Staff Papers, Palgrave Macmillan, vol. 42(2), pages 344-374, June.
  7. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August.
  8. Santomero, Anthony M & Seater, John J, 1978. "The Inflation-Unemployment Trade-off: A Critique of the Literature," Journal of Economic Literature, American Economic Association, vol. 16(2), pages 499-544, June.
  9. Meltzer, Allan H., 1986. "Size, persistence and interrelation of nominal and real shocks : Some evidence from four countries," Journal of Monetary Economics, Elsevier, vol. 17(1), pages 161-194, January.
  10. Hansen, Lars Peter & Singleton, Kenneth J, 1982. "Generalized Instrumental Variables Estimation of Nonlinear Rational Expectations Models," Econometrica, Econometric Society, vol. 50(5), pages 1269-86, September.
  11. Lawrence H. Summers, 1988. "Relative Wages, Efficiency Wages, and Keynesian Unemployment," NBER Working Papers 2590, National Bureau of Economic Research, Inc.
  12. Douglas Laxton & Guy Meredith & David Rose, 1994. "Asymmetric Effects of Economic Activityon Inflation," IMF Working Papers 94/139, International Monetary Fund.
  13. Bruce C. Greenwald & Joseph E. Stiglitz, 1988. "Examining Alternative Macroeconomic Theories," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 207-270.
  14. repec:fth:harver:1418 is not listed on IDEAS
  15. Brunner, Karl & Cukierman, Alex & Meltzer, Allan H., 1983. "Money and economic activity, inventories and business cycles," Journal of Monetary Economics, Elsevier, vol. 11(3), pages 281-319.
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Cited by:
  1. Grant Spencer & Ozer Karagedikli, 2006. "Modelling for monetary policy: the New Zealand experience," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 69, pages 8p., June.
  2. David Mayes & Matti Viren, 2002. "Asymmetry and the Problem of Aggregation in the Euro Area," Empirica, Springer, vol. 29(1), pages 47-73, March.
  3. Francisco Nadal De Simone, 2001. "Inflation Forecasting in Chile," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 4(3), pages 59-85, December.
  4. Iris Claus, 2000. "Is the output gap a useful indicator of inflation?," Reserve Bank of New Zealand Discussion Paper Series DP2000/05, Reserve Bank of New Zealand.
  5. Juha Kilponen & David Mayes & Jouko Vilmunen, 1999. "Labour Market Flexibility in Northern Europe," One Europe or Several? Working Papers 2, One-Europe Programme.
  6. Mayes , David G. & Virén , Matti, 2004. "Asymmetries in the Euro area economy," Research Discussion Papers 9/2004, Bank of Finland.
  7. Economics Department, 1996. "Economics Department research over the past year: a review," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 59, September.
  8. Mayes, David & Vilmunen, Jouko, 1999. "Unemployment in a Small Open Economy: Finland and New Zealand," Research Discussion Papers 10/1999, Bank of Finland.

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