How does slack influence inflation?
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.
Volume (Year): 17 (2011)
Issue (Month): June ()
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- 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.
- Giovanni P. Olivei & Michelle L. Barnes, 2004. "Inside and Outside Bounds: Threshold Estimates of the Phillips Curve," Econometric Society 2004 Australasian Meetings 295, Econometric Society.
- Zheng Liu & Glenn D. Rudebusch, 2010. "Inflation: mind the gap," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue jan19.
- 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.