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

  • Dupasquier, Chantal
  • Ricketts, Nicholas
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    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.

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    File URL: http://www.bankofcanada.ca/wp-content/uploads/2010/05/wp98-14.pdf
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    Paper provided by Bank of Canada in its series Working Papers with number 98-14.

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    Length: 31 pages
    Date of creation: 1998
    Date of revision:
    Handle: RePEc:bca:bocawp:98-14
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    Web page: http://www.bank-banque-canada.ca/

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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. Laurence Ball & N. Gregory Mankiw, 1992. "Asymmetric Price Adjustment and Economic Fluctuations," NBER Working Papers 4089, National Bureau of Economic Research, Inc.
    3. P Clark & D Laxton, 1997. "Phillips Curves," CEP Discussion Papers dp0344, Centre for Economic Performance, LSE.
    4. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
    5. 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.
    6. Stiglitz, Joseph E, 1984. "Price Rigidities and Market Structure," American Economic Review, American Economic Association, vol. 74(2), pages 350-55, May.
    7. Nicholas Ricketts & David Rose, . "Inflation, Learning And Monetary Policy Regimes In The G-7 Economies," Working Papers 95-6, Bank of Canada.
    8. Jean-François Fillion & André Léonard, 1997. "La courbe de Phillips au Canada : un examen de quelques hypothèses," Working Papers 97-3, Bank of Canada.
    9. 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, vol. 27(1), pages 1-76.
    10. 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, vol. 19(1), pages 1-82.
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