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Do Aggregate Demand Factors Influence Current Inflation Developments?

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Abstract

The relationship between inflation developments and aggregate demand is usually modeled with a Phillips curve. This study estimates the Phillips curve for Austria and, for the sake of comparison, for the euro area as well as for four euro area member countries. In order to test the robustness of our results, we estimate both the traditional and the New Keynesian Phillips Curve (NKPC) for the period from 1970 to 2007. We also investigate whether the relationship between economic activity and inflation has changed over time. The results show that there was indeed a significant relationship between inflation and the output gap in most countries; but its coefficient diminished over the years, and became insignificant in almost all countries toward the end of the estimation period. Exceptions are Austria and the Netherlands: For these countries the estimates are not significant, and for Austria we get contradictory results. We can conclude from this and from the observation that the output gap in the countries under review is now slightly negative, or at best closed, that the current rise in inflation is not the result of an overheating economy.

Suggested Citation

  • Fabio Rumler & Maria Teresa Valderrama, 2008. "Do Aggregate Demand Factors Influence Current Inflation Developments?," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue 2, pages 10-82.
  • Handle: RePEc:onb:oenbmp:y:2008:i:2:b:3
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    File URL: https://www.oenb.at/dam/jcr:cb20948d-d477-4985-8443-232c8980c896/mop_2008_2_analyses_3_tcm16-88557.pdf
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    Cited by:

    1. Rumler, Fabio & Valderrama, Maria Teresa, 2010. "Comparing the New Keynesian Phillips Curve with time series models to forecast inflation," The North American Journal of Economics and Finance, Elsevier, vol. 21(2), pages 126-144, August.
    2. Ernest Gnan, 2009. "Energy, Commodity and Food Price Volatility: What Policy Responses?," CESifo Forum, Ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 10(1), pages 21-28, April.

    More about this item

    Keywords

    demand-driven inflation; traditional Phillips curve; New Keynesian Phillips Curve;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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