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What Determines the Relation between the Output Gap and Inflation ? An International Comparison of Inflation Expectations and Staggered Wage Adjustment

  • Higo, Masahiro

    (Institute for Monetary & Econ Studies, Bank of Japan)

  • Nakada, Sachiko-Kuroda

    (Institute for Monetary & Econ Studies, Bank of Japan)

This paper undertakes a cross-country study on the price- output gap relationship for selected industrialized countries (Japan, the U.S., Germany, the U.K., and Canada). The estimation results show that the price-output gap relationship in these countries can be classified into two categories: (1) a Phillips Curve type (in which the output gap fluctuation affects the inflation rate); and (2) a NAIRU type (in which fluctuations in the output gap affect changes in the inflation rate). In addition, such classifications may vary according to the sample period chosen. During the first half of the observation period (1978-86), NAIRU- type relations existed in all countries except Japan. During the second half (1987-97), NAIRU-type relations were observed in the U.S., the U.K., and Canada, while Phillips Curve-type relations were indicated in Japan and Germany. These results lead to the presumption that the price-output gap relationship is influenced by the recent inflation record, which is one of the most important factors that determine the formation mechanism of inflation expectations and the speed of price adjustment.

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Article provided by Institute for Monetary and Economic Studies, Bank of Japan in its journal Monetary and Economic Studies.

Volume (Year): 17 (1999)
Issue (Month): 3 (December)
Pages: 129-155

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Handle: RePEc:ime:imemes:v:17:y:1999:i:3:p:129-155
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  1. Cara S. Lown & Robert W. Rich, 1997. "Is there an inflation puzzle?," Research Paper 9723, Federal Reserve Bank of New York.
  2. Robert J. Gordon, 1996. "The Time-Varying NAIRU and its Implications for Economic Policy," NBER Working Papers 5735, National Bureau of Economic Research, Inc.
  3. Christina D. Romer, 1996. "Inflation and the Growth Rate of Output," NBER Working Papers 5575, National Bureau of Economic Research, Inc.
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