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How does slack influence inflation?

Author

Listed:
  • Richard Peach
  • Robert W. Rich
  • Anna Cororaton

Abstract

Economists have long studied the relationship between resource utilization and inflation. Theory suggests that when firms use labor and capital very intensively, production costs tend to rise and firms have more scope to pass those cost increases along in the form of higher product prices. In contrast, when that level of intensity is relatively low—that is, when the economy is operating with slack—production costs tend to rise more slowly (or even fall) and firms have less scope for raising prices. Empirical evidence, however, has varied concerning the exact nature of the relationship between resource utilization and inflation. In this study, the authors reexamine this relationship by evaluating the presence of “threshold effects.” They find that the level of intensity of resource utilization must be below or above certain critical values before it can help to forecast movements in inflation.

Suggested Citation

  • Richard Peach & Robert W. Rich & Anna Cororaton, 2011. "How does slack influence inflation?," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 17(June).
  • Handle: RePEc:fip:fednci:y:2011:i:june:n:v.17no.3
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    References listed on IDEAS

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    1. Michelle L. Barnes & Giovanni P. Olivei, 2003. "Inside and outside bounds: threshold estimates of the Phillips curve," New England Economic Review, Federal Reserve Bank of Boston, pages 3-18.
    2. Zheng Liu & Glenn D. Rudebusch, 2010. "Inflation: mind the gap," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue jan19.
    3. Andrew Atkeson & Lee E. Ohanian, 2001. "Are Phillips curves useful for forecasting inflation?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 2-11.
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    Citations

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    Cited by:

    1. Kapur, Muneesh, 2013. "Revisiting the Phillips curve for India and inflation forecasting," Journal of Asian Economics, Elsevier, vol. 25(C), pages 17-27.
    2. Fröhling, Annette & Lommatzsch, Kirsten, 2011. "Output sensitivity of inflation in the euro area: Indirect evidence from disaggregated consumer prices," Discussion Paper Series 1: Economic Studies 2011,25, Deutsche Bundesbank.
    3. Liu, Yuelin & Morley, James, 2014. "Structural evolution of the postwar U.S. economy," Journal of Economic Dynamics and Control, Elsevier, vol. 42(C), pages 50-68.
    4. Jun Il Kim, 2014. "Comments on James Morley's paper," BIS Papers chapters,in: Bank for International Settlements (ed.), Globalisation, inflation and monetary policy in Asia and the Pacific, volume 77, pages 51-54 Bank for International Settlements.
    5. S. Guilloux-Nefussi, 2016. "Globalization, Market Structure and Inflation Dynamics," Working papers 610, Banque de France.
    6. repec:eee:jpolmo:v:39:y:2017:i:2:p:247-271 is not listed on IDEAS
    7. Albuquerque, Bruno & Baumann, Ursel, 2017. "Will US inflation awake from the dead? The role of slack and non-linearities in the Phillips curve," Journal of Policy Modeling, Elsevier, vol. 39(2), pages 247-271.
    8. Kanellopoulos, Nikolaos C. & Koutroulis, Aristotelis G., 2016. "Non-linearities in euro area inflation persistence," Economic Modelling, Elsevier, vol. 59(C), pages 116-123.
    9. Lars Osberg, 2011. "Why Did Unemployment Disappear from Official Macro-Economic Policy Discourse in Canada?," New Directions for Intelligent Government in Canada: Papers in Honour of Ian Stewart,in: Fred Gorbet & Andrew Sharpe (ed.), New Directions for Intelligent Government in Canada: Papers in Honour of Ian Stewart, pages 127-162 Centre for the Study of Living Standards.
    10. Amstad, Marlene & Potter, Simon M. & Rich, Robert W., 2014. "The FRBNY staff underlying inflation gauge: UIG," Staff Reports 672, Federal Reserve Bank of New York.

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