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Non-Linearities in the Output-Inflation Relationship: Some Empirical Results for Canada

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  • Dupasquier, Chantal
  • Ricketts, Nicholas

Abstract

This paper analyzes the short-run dynamic process of inflation in Canada and examines whether a systematic variation in the relationship between inflation and output can be detected over time. In the theoretical literature, different models of price-setting behaviour predict that the slope of the Phillips curve will be a function of macroeconomic conditions, implying a time-varying sacrifice ratio. Evidence for four different types of asymmetry is presented in the context of short-run Phillips curves estimated in a state-space framework. The results suggest that there is significant time variation in the trade-off in Canada, but that it is difficult to distinguish definitively among the possible models generating the non-linearity.

Suggested Citation

  • Dupasquier, Chantal & Ricketts, Nicholas, 1998. "Non-Linearities in the Output-Inflation Relationship: Some Empirical Results for Canada," Staff Working Papers 98-14, Bank of Canada.
  • Handle: RePEc:bca:bocawp:98-14
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    References listed on IDEAS

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    1. Tiff Macklem, 1997. "Capacity constraints, price adjustment, and monetary policy," Bank of Canada Review, Bank of Canada, vol. 1997(Spring), pages 39-56.
    2. Stiglitz, Joseph E, 1984. "Price Rigidities and Market Structure," American Economic Review, American Economic Association, pages 350-355.
    3. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
    4. Laurence Ball & N. Gregory Mankiw & David Romer, 1988. "The New Keynsesian Economics and the Output-Inflation Trade-off," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, pages 1-82.
    5. P Clark & D Laxton, 1997. "Phillips Curves," CEP Discussion Papers dp0344, Centre for Economic Performance, LSE.
    6. George A. Akerlof & William R. Dickens & George L. Perry, 1996. "The Macroeconomics of Low Inflation," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, pages 1-76.
    7. Ball, L. & Mankiw, N.G., 1992. "Asymmetric Price Adjustment and Economic Fluctuations," Harvard Institute of Economic Research Working Papers 1602, Harvard - Institute of Economic Research.
    8. Ball, Laurence & Mankiw, N Gregory, 1994. "Asymmetric Price Adjustment and Economic Fluctuations," Economic Journal, Royal Economic Society, vol. 104(423), pages 247-261, March.
    9. Nicholas Ricketts & David Rose, "undated". "Inflation, Learning And Monetary Policy Regimes In The G-7 Economies," Staff Working Papers 95-6, Bank of Canada.
    10. Peter B. Clark & Douglas Laxton & David Rose, 1995. "Capacity Constraints, Inflation and the Transmission Mechanism; Forward-Looking Versus Myopic Policy Rules," IMF Working Papers 95/75, International Monetary Fund.
    11. Jean-François Fillion & André Léonard, 1997. "La courbe de Phillips au Canada : un examen de quelques hypothèses," Staff Working Papers 97-3, Bank of Canada.
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    Citations

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    Cited by:

    1. Yetman, James, 2003. "Probing potential output: Monetary policy, credibility, and optimal learning under uncertainty," Journal of Macroeconomics, Elsevier, pages 311-330.
    2. Dungey, Mardi & Pitchford, John, 2000. "The Steady Inflation Rate of Economic Growth," The Economic Record, The Economic Society of Australia, vol. 76(235), pages 386-400, December.
    3. Gómez García, F. & Rebollo Sanz, Y. & Usabiaga Ibáñez, C., 2002. "Nuevas estimaciones de la NAIRU de la economía española: métodos directos," Estudios de Economía Aplicada, Estudios de Economía Aplicada, pages 509-530.
    4. Agénor, Pierre-Richard & Bayraktar, Nihal, 2010. "Contracting models of the Phillips curve empirical estimates for middle-income countries," Journal of Macroeconomics, Elsevier, pages 555-570.
    5. Kichian, Maral, 1999. "Measuring Potential Output within a State-Space Framework," Staff Working Papers 99-9, Bank of Canada.
    6. Correa, Arnildo da Silva & Minella, André, 2010. "Nonlinear Mechanisms of the Exchange Rate Pass-Through: A Phillips Curve Model with Threshold for Brazil," Revista Brasileira de Economia - RBE, FGV/EPGE - Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil), vol. 64(3), September.
    7. Miguel St. Aubyn, 2000. "Testing for Asymmetry in the Inflation-Unemployment Trade-off: Some Evidence for the USA," Working Papers Department of Economics 2000/05, ISEG - Lisbon School of Economics and Management, Department of Economics, Universidade de Lisboa.
    8. Maral Kichian, 2001. "On the Nature and the Stability of the Canadian Phillips Curve," Staff Working Papers 01-4, Bank of Canada.
    9. Alvaroriascos & Luis Fernando Melo Velandia, 2004. "Sobre Los Efectos Dela Politica Monetaria Encolombia," ENSAYOS SOBRE POLÍTICA ECONÓMICA, BANCO DE LA REPÚBLICA - ESPE, vol. 22(45), pages 172-221, June.
    10. Yetman, James, 2003. "Probing potential output: Monetary policy, credibility, and optimal learning under uncertainty," Journal of Macroeconomics, Elsevier, pages 311-330.
    11. Allan Crawford, 2001. "How Rigid Are Nominal-Wage Rates?," Staff Working Papers 01-8, Bank of Canada.
    12. Eliasson, Ann-Charlotte, 2001. "Is the Short-run Phillips Curve Nonlinear? Empirical Evidence for Australia, Sweden and the United States," Working Paper Series 124, Sveriges Riksbank (Central Bank of Sweden).
    13. Kumar, Anil & M. Orrenius, Pia, 2016. "A closer look at the Phillips curve using state-level data," Journal of Macroeconomics, Elsevier, pages 84-102.
    14. Agénor, Pierre-Richard & Bayraktar, Nihal, 2010. "Contracting models of the Phillips curve empirical estimates for middle-income countries," Journal of Macroeconomics, Elsevier, pages 555-570.

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    Keywords

    Inflation; Productivity;

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