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Asymmetric Effects of Economic Activityon Inflation; Evidence and Policy Implications

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  • Douglas Laxton
  • Guy M Meredith
  • David Rose

Abstract

This paper examines the evidence on asymmetries in the effects of activity on inflation. Data for the G-7 countries are found to strongly support the view that the inflation-activity relationship is nonlinear, 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 the implications of linear models. One implication of these results is that policymakers can raise the average level of output over time by responding promptly to demand shocks, thus reducing the variance of output around trend.

Suggested Citation

  • Douglas Laxton & Guy M Meredith & David Rose, 1994. "Asymmetric Effects of Economic Activityon Inflation; Evidence and Policy Implications," IMF Working Papers 94/139, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:94/139
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    Keywords

    Inflation; aggregate demand; monetary policy; real interest rate; monetary authority;

    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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