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The lead of output over inflation in sticky price models

  • Michael Kiley


    (Federal Reserve Board and OECD)

Output growth is negatively correlated with inflation, detrended output is positively correlated with inflation, and output growth and detrended output lead inflation. I explore the consistency of these correlations with three models of price adjustment: the partial adjustment model, a staggered price setting model, and the P-bar model. The ratio of the variance of supply to demand shocks necessary to match the pattern of output-inflation correlations can be ranked across the three models the P-Bar model requires the lowest ratio, and the partial adjustment model requires the highest ratio. The imperfect information aspects of staggered price setting and the P-bar model drive some of the output/inflation nexus, highlighting a link with the tradition from Hume to Lucas to recent work by Mankiw and Reis.

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Article provided by AccessEcon in its journal Economics Bulletin.

Volume (Year): 5 (2002)
Issue (Month): 5 ()
Pages: 1-7

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Handle: RePEc:ebl:ecbull:eb-02e00004
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