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The Possible Unemployment Cost of Average Inflation below a Credible Target

  • Lars E.O. Svensson

If inflation expectations become firmly anchored at the inflation target even when average inflation deviates from the target, the long-run Phillips curve becomes non-vertical. During 1997-2011, average inflation expectations in Sweden have been close to the inflation target of 2 percent, whereas average inflation has fallen short of the target by 0.6 percentage points. The estimates reported suggest that the slope of the long-run Phillips curve is about 0.75. Then the average unemployment rate has been about 0.8 percentage points higher than if average inflation had been on target. This is a large unemployment cost of undershooting the inflation target.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 19442.

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Date of creation: Sep 2013
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Publication status: published as The Possible Unemployment Cost of Average Inflation below a Credible Target , Lars E. O. Svensson. in Lessons from the Financial Crisis for Monetary Policy , Gertler. 2015
Handle: RePEc:nbr:nberwo:19442
Note: IFM ME
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  1. Lars E. O. Svensson, 1996. "Inflation Forecast Targeting: Implementing and Monitoring Inflation Targets," NBER Working Papers 5797, National Bureau of Economic Research, Inc.
  2. Thomas Jonsson & Pär Österholm, 2012. "The properties of survey-based inflation expectations in Sweden," Empirical Economics, Springer, vol. 42(1), pages 79-94, February.
  3. Glenn D. Rudebusch & Lars E. O. Svensson, 1998. "Policy rules for inflation targeting," Working Papers in Applied Economic Theory 98-03, Federal Reserve Bank of San Francisco.
  4. Nessen, Marianne & Vestin, David, 2005. "Average Inflation Targeting," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(5), pages 837-63, October.
  5. Assar Lindbeck & Dennis J. Snower, 2001. "Insiders versus Outsiders," Journal of Economic Perspectives, American Economic Association, vol. 15(1), pages 165-188, Winter.
  6. Per Lundborg & Hans Sacklén, 2006. "Low-inflation Targeting and Long-run Unemployment," Scandinavian Journal of Economics, Wiley Blackwell, vol. 108(3), pages 397-418, October.
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