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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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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. Santomero, Anthony M & Seater, John J, 1978. "The Inflation-Unemployment Trade-off: A Critique of the Literature," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 16(2), pages 499-544, June.
  2. Svensson, Lars E.O., 1997. "Inflation Forecast Targeting: Implementing and Monitoring Inflation Targets," Seminar Papers, Stockholm University, Institute for International Economic Studies 615, Stockholm University, Institute for International Economic Studies.
  3. Ball, Laurence & Mankiw, N Gregory, 1994. "Asymmetric Price Adjustment and Economic Fluctuations," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 104(423), pages 247-61, March.
  4. Meltzer, Allan H., 1986. "Size, persistence and interrelation of nominal and real shocks : Some evidence from four countries," Journal of Monetary Economics, Elsevier, Elsevier, vol. 17(1), pages 161-194, January.
  5. Lawrence H. Summers, 1988. "Relative Wages, Efficiency Wages, and Keynesian Unemployment," NBER Working Papers 2590, National Bureau of Economic Research, Inc.
  6. Robert J. Barro & David B. Gordon, 1981. "A Positive Theory of Monetary Policy in a Natural-Rate Model," NBER Working Papers 0807, National Bureau of Economic Research, Inc.
  7. Douglas Laxton & Guy Meredith & David Rose, 1995. "Asymmetric Effects of Economic Activity on Inflation: Evidence and Policy Implications," IMF Staff Papers, Palgrave Macmillan, Palgrave Macmillan, vol. 42(2), pages 344-374, June.
  8. Bruce C. Greenwald & Joseph E. Stiglitz, 1988. "Examining Alternative Macroeconomic Theories," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 207-270.
  9. repec:fth:harver:1418 is not listed on IDEAS
  10. Douglas Laxton & Peter B. Clark & David Rose, 1995. "Asymmetry in the U.S. Output-Inflation Nexus," IMF Working Papers, International Monetary Fund 95/76, International Monetary Fund.
  11. Douglas Laxton & Guy Meredith & David Rose, 1994. "Asymmetric Effects of Economic Activityon Inflation," IMF Working Papers, International Monetary Fund 94/139, International Monetary Fund.
  12. Jeffrey C. Fuhrer, 1995. "The persistence of inflation and the cost of disinflation," New England Economic Review, Federal Reserve Bank of Boston, Federal Reserve Bank of Boston, issue Jan, pages 3-16.
  13. Brunner, Karl & Cukierman, Alex & Meltzer, Allan H., 1983. "Money and economic activity, inventories and business cycles," Journal of Monetary Economics, Elsevier, Elsevier, vol. 11(3), pages 281-319.
  14. 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, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 37(2), pages 283-98, May.
  15. Hansen, Lars Peter & Singleton, Kenneth J, 1982. "Generalized Instrumental Variables Estimation of Nonlinear Rational Expectations Models," Econometrica, Econometric Society, Econometric Society, vol. 50(5), pages 1269-86, September.
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Cited by:
  1. Francisco Nadal De Simone, 2001. "Inflation Forecasting in Chile," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, Central Bank of Chile, vol. 4(3), pages 59-85, December.
  2. Mayes, David G & Virén, Matti, 2000. "Asymmetry and the Problem of Aggregation in the Euro Area," Research Discussion Papers, Bank of Finland 11/2000, Bank of Finland.
  3. Iris Claus, 2000. "Is the output gap a useful indicator of inflation?," Reserve Bank of New Zealand Discussion Paper Series, Reserve Bank of New Zealand DP2000/05, Reserve Bank of New Zealand.
  4. Grant Spencer & Ozer Karagedikli, 2006. "Modelling for monetary policy: the New Zealand experience," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, Reserve Bank of New Zealand, vol. 69, pages 8p., June.
  5. Mayes , David G. & Virén , Matti, 2004. "Asymmetries in the Euro area economy," Research Discussion Papers, Bank of Finland 9/2004, Bank of Finland.
  6. Economics Department, 1996. "Economics Department research over the past year: a review," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, Reserve Bank of New Zealand, vol. 59, September.
  7. Mayes, David & Vilmunen, Jouko, 1999. "Unemployment in a Small Open Economy: Finland and New Zealand," Research Discussion Papers, Bank of Finland 10/1999, Bank of Finland.
  8. Kilponen, Juha & Mayes, David & Vilmunen, Jouko, 1999. "Labour Market Flexibility in Northern Europe," ERSA conference papers, European Regional Science Association ersa99pa088, European Regional Science Association.

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