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Measuring macroeconomic performance through a non-parametric Taylor curve

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Recently, frontier techniques have been utilised in the measurement of countries' macroeconomic performance by constructing a "production set" where the outputs are some macroeconomic indicators, while the inputs collapse to a unit scalar. In the present study, a different approach is proposed. The trade-off between the variability of inflation and of the level of activity (often defined as the Taylor Curve) is posited as the relevant policy frontier. This frontier is estimated through non-parametric techniques on a sample of 19 OECD countries during the 1960-99 period. There seems to be a definite role for cost-shocks, as well as for some supply-side characteristics, in shifting the variability trade-off. Also, the relative shadow price of the variability of inflation increases over time. Countries appear on the whole to have become slightly more efficient, but their performance has worsened, because the frontier has shifted upwards.

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Paper provided by Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number 95.

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Date of creation: 02 Apr 2003
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Handle: RePEc:sef:csefwp:95

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Keywords: inflation-output variability trade-off; labour market rigidities; policy efficiency;

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  1. Stephen G. Cecchetti & Michael Ehrmann, 2002. "Does Inflation Targeting Increase Output Volatility?: An International Comparison of Policymakers' Preferences and Outcomes," Central Banking, Analysis, and Economic Policies Book Series, in: Norman Loayza & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series (ed.), Monetary Policy: Rules and Transmission Mechanisms, edition 1, volume 4, chapter 9, pages 247-274 Central Bank of Chile.
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  13. John B. Taylor, 1996. "How should monetary policy respond to shocks while maintaining long-run price stability? Conceptual issues," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 181-195.
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