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Inflation, slack, and Fed credibility

Author

Listed:
  • Koenig, Evan F.
  • Atkinson, Tyler

Abstract

It is generally agreed that slack has some impact on inflation. There is much less agreement on what form the relationship takes and whether it is stable enough to reliably help predict inflation. This analysis focuses on the Great Moderation period. We find that slack (as measured by the unemployment rate) and changes in slack are negatively correlated with changes in inflation and also deviations of inflation from long-forward inflation expectations.> ; These relationships could have been exploited to produce forecasts of trimmed mean PCE inflation more accurate than rule-of-thumb forecasts. Forecasts of trimmed mean PCE inflation also serve well as predictions of GDP inflation and headline PCE inflation. Our analysis suggests that currently high levels of slack should hold inflation below two percent over 2012.

Suggested Citation

  • Koenig, Evan F. & Atkinson, Tyler, 2012. "Inflation, slack, and Fed credibility," Staff Papers, Federal Reserve Bank of Dallas, issue Jan.
  • Handle: RePEc:fip:feddst:y:2012:i:jan:n:16
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    File URL: http://www.dallasfed.org/assets/documents/research/staff/staff1201.pdf
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    References listed on IDEAS

    as
    1. James Dolmas, 2005. "A fitter, trimmer core inflation measure," Southwest Economy, Federal Reserve Bank of Dallas, issue May, pages 1,4-9.
    2. N. Gregory Mankiw & Ricardo Reis, 2002. "Sticky Information versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve," The Quarterly Journal of Economics, Oxford University Press, vol. 117(4), pages 1295-1328.
    3. James H. Stock & Mark W. Watson, 2010. "Modeling inflation after the crisis," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 173-220.
    4. Evan F. Koenig, 1996. "Aggregate price adjustment: the Fischerian alternative," Working Papers 9615, Federal Reserve Bank of Dallas.
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    Keywords

    Price levels; Forecasting;

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