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Switching impacts of the output gap on inflation: Evidence from Canada, the UK and the US

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  • Valadkhani, Abbas

Abstract

This paper examines the way in which output gap influences quarterly inflation during the period 1970q1–2013q1 in Canada, the UK and the US by adopting a Markov regime-switching model. In addition to the regime-dependent effects of the output gap, this study controls for the regime-invariant influences arising from changes in wages, oil prices and the nominal effective exchange rate. An interesting finding of this paper relates to the positive but varying impact of the output gap on inflation. Two significantly different regimes are identified whereby the probability of switching to regime 2 (represented by a relatively high output gap coefficient) peaks markedly and consistently across all three countries only when quarterly changes in inflation become noticeably large and volatile. The cross-country results provide compelling evidence that the coefficient assigned to the output gap rises significantly when the economy experiences sizable perturbations.

Suggested Citation

  • Valadkhani, Abbas, 2014. "Switching impacts of the output gap on inflation: Evidence from Canada, the UK and the US," International Review of Economics & Finance, Elsevier, vol. 33(C), pages 270-285.
  • Handle: RePEc:eee:reveco:v:33:y:2014:i:c:p:270-285
    DOI: 10.1016/j.iref.2014.06.001
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    Cited by:

    1. Valadkhani, Abbas, 2014. "Dynamic effects of rising oil prices on consumer energy prices in Canada and the United States: Evidence from the last half a century," Energy Economics, Elsevier, vol. 45(C), pages 33-44.
    2. Abbas Valadkhani, 2015. "Asymmetric size-dependent effects of the output gap on inflation: US evidence from the last half a century," Applied Economics, Taylor & Francis Journals, vol. 47(33), pages 3525-3539, July.
    3. Abbas, Syed K. & Bhattacharya, Prasad Sankar & Sgro, Pasquale, 2016. "The new Keynesian Phillips curve: An update on recent empirical advances," International Review of Economics & Finance, Elsevier, vol. 43(C), pages 378-403.
    4. repec:eee:reveco:v:51:y:2017:i:c:p:245-257 is not listed on IDEAS

    More about this item

    Keywords

    Inflation; Output gap; Monetary policy;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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