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The lead of output over inflation in sticky price models

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  • Michael T. Kiley

Abstract

Output growth is negatively correlated with inflation, and detrended output is positively correlated with inflation, in the major North American and European economies. In addition, output growth and detrended output lead inflation. I explore the consistency of these correlations with three models of price adjustment: the partial adjustment model, a staggered price setting model, and the P-bar model. The ratio of the variance of supply to demand shocks necessary to match the pattern of output- inflation correlations can be ranked across the three models; the P-Bar model requires the lowest ratio, and the partial adjustment model requires the highest ratio. These results reveal that the recent burst of researchers using the partial adjustment model will find a larger role for supply shocks than alternative models of price rigidity.

Suggested Citation

  • Michael T. Kiley, 1996. "The lead of output over inflation in sticky price models," Finance and Economics Discussion Series 96-33, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgfe:96-33
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    Cited by:

    1. Kiley, Michael T., 1997. "Efficiency wages, nominal rigidities and the cyclical behavior of real wages and marginal cost," Economics Letters, Elsevier, vol. 56(2), pages 215-221, October.
    2. Cover James Peery & Pecorino Paul, 2003. "Optimal Monetary Policy and the Correlation between Prices and Output," The B.E. Journal of Macroeconomics, De Gruyter, vol. 3(1), pages 1-21, February.
    3. Svensson, Lars E. O., 2000. "Open-economy inflation targeting," Journal of International Economics, Elsevier, vol. 50(1), pages 155-183, February.
    4. Mohamed Safouane Ben Aïssa & Olivier Musy, 2011. "The Dynamic Properties Of Alternative Assumptions On Price Adjustment In New Keynesian Models," Bulletin of Economic Research, Wiley Blackwell, vol. 63(4), pages 353-384, October.
    5. Nelson, E., 1998. "Sluggish inflation and optimizing models of the business cycle," Journal of Monetary Economics, Elsevier, vol. 42(2), pages 303-322, July.

    More about this item

    Keywords

    Inflation (Finance) ; Productivity ; Prices;

    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles

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