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Nonlinearity of the inflation-output trade-off and time-varying price rigidity

  • Antonia López-Villavicencio
  • Valérie Mignon

Relying on the backward-looking Phillips curve; we estimate the level of inflation that erodes price rigidity and investigate its time constancy. To this end; we employ smooth transition regression models with rolling regressions to account for varying threshold inflation levels. Studying six advanced countries over the 1970-2012 period; our results show that both the slope of the Phillips curve and the threshold; trend inflation that erodes price rigidity are time varying. These characteristics could not be captured by a static linear or nonlinear model; illustrating the rich flexibility embedded in our proposed model.

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Paper provided by CEPII research center in its series Working Papers with number 2013-02.

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Date of creation: Jan 2013
Date of revision:
Handle: RePEc:cii:cepidt:2013-02
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  1. Joseph G. Altonji & Paul J. Devereux, 1999. "The Extent and Consequences of Downward Nominal Wage Rigidity," NBER Working Papers 7236, National Bureau of Economic Research, Inc.
  2. Uhlig, Harald, 2012. "Economics and reality," Journal of Macroeconomics, Elsevier, vol. 34(1), pages 29-41.
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  5. Dolado, Juan J. & Maria-Dolores, Ramon & Naveira, Manuel, 2005. "Are monetary-policy reaction functions asymmetric?: The role of nonlinearity in the Phillips curve," European Economic Review, Elsevier, vol. 49(2), pages 485-503, February.
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  8. Holzer, Harry J & Montgomery, Edward B, 1993. "Asymmetries and Rigidities in Wage Adjustments by Firms," The Review of Economics and Statistics, MIT Press, vol. 75(3), pages 397-408, August.
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  10. Doyle, Matthew & Beaudry, Paul, 2000. "What Happened to the Phillips Curve in the 1990s in Canada," Staff General Research Papers 10286, Iowa State University, Department of Economics.
  11. Robert J. Gordon, 1981. "Inflation, Flexible Exchange Rates, and the Natural Rate of Unemployment," NBER Working Papers 0708, National Bureau of Economic Research, Inc.
  12. Alberto Musso & Livio Stracca & Dick van Dijk, 2009. "Instability and Nonlinearity in the Euro-Area Phillips Curve," International Journal of Central Banking, International Journal of Central Banking, vol. 5(2), pages 181-212, June.
  13. Athanasios Orphanides & David W. Wilcox, 1996. "The opportunistic approach to disinflation," Finance and Economics Discussion Series 96-24, Board of Governors of the Federal Reserve System (U.S.).
  14. Ken Kuttner & Tim Robinson, 2008. "Understanding the Flattening Phillips Curve," Department of Economics Working Papers 2008-15, Department of Economics, Williams College.
  15. Mankiw, N Gregory, 1985. "Small Menu Costs and Large Business Cycles: A Macroeconomic Model," The Quarterly Journal of Economics, MIT Press, vol. 100(2), pages 529-38, May.
  16. Joseph E. Stiglitz, 1984. "Theories of Wage Rigidity," NBER Working Papers 1442, National Bureau of Economic Research, Inc.
  17. Terasvirta, T & Anderson, H M, 1992. "Characterizing Nonlinearities in Business Cycles Using Smooth Transition Autoregressive Models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 7(S), pages S119-36, Suppl. De.
  18. Lewis, Matt, 2003. "Asymmetric Price Adjustment and Consumer Search: An Examination of the Retail Gasoline Industry," Department of Economics, Working Paper Series qt544216d9, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  19. Stiglitz, Joseph E, 1984. "Price Rigidities and Market Structure," American Economic Review, American Economic Association, vol. 74(2), pages 350-55, May.
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