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Why Is Inflation Low When Productivity Growth Is High?

  • Michael T. Kiley

Inflation has been low when productivity growth has been high. This occurs because the Federal Reserve has not adjusted nominal income growth in response to changes in productivity growth, implying that an acceleration in trend productivity growth leads to a deceleration in inflation. The model's predictions are confirmed: (1) Inflation should fall when trend productivity growth rises, and (2) nominal income and wage growth should not change with trend productivity. The model also implies that productivity growth enters a Phillips curve relationship as a proxy for inflation expectations. Thus, estimates of the NAIRU should fall when productivity growth accelerates. (JEL E31, E50, E52) Copyright 2003, Oxford University Press.

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Article provided by Western Economic Association International in its journal Economic Inquiry.

Volume (Year): 41 (2003)
Issue (Month): 3 (July)
Pages: 392-406

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Handle: RePEc:oup:ecinqu:v:41:y:2003:i:3:p:392-406
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