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Asymmetric Effects of Economic Activity on Inflation: Evidence and Policy Implications

Author

Listed:
  • Douglas Laxton

    (International Monetary Fund)

  • Guy Meredith

    (International Monetary Fund)

  • David Rose

    (International Monetary Fund)

Abstract

Data for the G-7 countries strongly support the view that economic activity has a nonlinear effect on inflation, with high levels of activity raising inflation by more than low levels decrease it. In the face of such asymmetries, the average level of output in an economy subject to demand shocks will be below the level of output at which there is no tendency for inflation to rise or fall, contrary to linear model predictions. One implication is that policymakers can raise the average level of output over time by responding promptly to demand shocks, reducing the variance of output around trend.

Suggested Citation

  • Douglas Laxton & Guy Meredith & David Rose, 1995. "Asymmetric Effects of Economic Activity on Inflation: Evidence and Policy Implications," IMF Staff Papers, Palgrave Macmillan, vol. 42(2), pages 344-374, June.
  • Handle: RePEc:pal:imfstp:v:42:y:1995:i:2:p:344-374
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    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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