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The Possible Unemployment Cost of Average Inflation below a Credible Target

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  • Lars E.O. Svensson

Abstract

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.

Suggested Citation

  • Lars E.O. Svensson, 2013. "The Possible Unemployment Cost of Average Inflation below a Credible Target," NBER Working Papers 19442, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:19442
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    References listed on IDEAS

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    1. Jansson, Per & Vredin, Anders, 2003. "Forecast-Based Monetary Policy: The Case of Sweden," International Finance, Wiley Blackwell, vol. 6(3), pages 349-380, Winter.
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    6. Carl Andreas Claussen, 2013. "Are Swedish houses overpriced?," International Journal of Housing Markets and Analysis, Emerald Group Publishing, vol. 6(2), pages 180-196, May.
    7. Lars E O Svensson, 2005. "Monetary Policy with Judgment: Forecast Targeting," International Journal of Central Banking, International Journal of Central Banking, vol. 1(1), May.
    8. Glenn Rudebusch & Lars E.O. Svensson, 1999. "Policy Rules for Inflation Targeting," NBER Chapters,in: Monetary Policy Rules, pages 203-262 National Bureau of Economic Research, Inc.
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    13. 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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    15. Pierre Gosselin & Aileen Lotz & Charles Wyplosz, 2008. "The Expected Interest Rate Path: Alignment of Expectations vs. Creative Opacity," International Journal of Central Banking, International Journal of Central Banking, vol. 4(3), pages 145-185, September.
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    Blog mentions

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    1. La tumultueuse expérience suédoise du forward guidance
      by ? in D'un champ l'autre on 2015-01-04 04:00:00
    2. Ein doppelt teurer Spass
      by Ekkehart Schlicht in Funktionale Staatsfinanzen on 2015-01-12 22:24:00

    Citations

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    Cited by:

    1. Ricardo Reis, 2013. "Central Bank Design," Journal of Economic Perspectives, American Economic Association, vol. 27(4), pages 17-44, Fall.
    2. repec:eee:jpolmo:v:39:y:2017:i:2:p:349-370 is not listed on IDEAS
    3. Calmfors, Lars, 2015. "The Swedish Macroeconomic Policy Framework," Working Paper Series 1075, Research Institute of Industrial Economics.
    4. Karlsson, Sune & Österholm, Pär, 2018. "Is the US Phillips Curve Stable? Evidence from Bayesian VARs," Working Papers 2018:5, Örebro University, School of Business.
    5. Eric Leeper & James Nason, 2014. "Bringing Financial Stability into Monetary Policy," Caepr Working Papers 2014-003, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.
    6. Hjalmarsson, Erik & Österholm, Pär, 2017. "Households’ Mortgage-Rate Expectations: More Realistic than at First Glance?," Working Papers 2017:9, Örebro University, School of Business.
    7. Francesca Rondina, 2018. "Estimating Unobservable Inflation Expectations in the New Keynesian Phillips Curve," Econometrics, MDPI, Open Access Journal, vol. 6(1), pages 1-20, February.
    8. Mallick, Debdulal, 2016. "Policy Regimes and the Shape of the Phillips Curve in Australia," MPRA Paper 71082, University Library of Munich, Germany, revised 2016.
    9. A. Stevens, 2013. "What inflation developments reveal about the Phillips curve: implications for monetary policy," Economic Review, National Bank of Belgium, issue iii, pages 67-76, December.
    10. Andrea Vaona, 2015. "Anomalous empirical evidence on money long-run super-neutrality and the vertical long-run Phillips curve," Working Papers 17/2015, University of Verona, Department of Economics.
    11. Stefano, Fasani, 2016. "Long-run Unemployment and Macroeconomic Volatility," Working Papers 352, University of Milano-Bicocca, Department of Economics, revised 18 Oct 2016.
    12. Benati, Luca, 2015. "The long-run Phillips curve: A structural VAR investigation," Journal of Monetary Economics, Elsevier, vol. 76(C), pages 15-28.
    13. Friedrich, Christian, 2016. "Global inflation dynamics in the post-crisis period: What explains the puzzles?," Economics Letters, Elsevier, vol. 142(C), pages 31-34.
    14. Andersson, Fredrik N. G. & Jonung, Lars, 2017. "How Tolerant Should Inflation-Targeting Central Banks Be? Selecting the Proper Tolerance Band - Lessons from Sweden," Working Papers 2017:2, Lund University, Department of Economics.
    15. repec:inu:caeprp:2014003 is not listed on IDEAS
    16. Andersson, Fredrik N. G. & Jonung, Lars, 2014. "The Return of the Original Phillips curve? An Assessment of Lars E. O. Svensson's Critique of the Riksbank's Inflation Targeting, 1997-2012," Working Papers 2014:28, Lund University, Department of Economics, revised 10 Dec 2015.
    17. Lennart Erixon, 2015. "Can fiscal austerity be expansionary in present-day Europe? The lessons from Sweden," Review of Keynesian Economics, Edward Elgar Publishing, vol. 3(4), pages 567—601-5, October.
    18. David G. Blanchflower & Andrew T. Levin, 2015. "Labor Market Slack and Monetary Policy," NBER Working Papers 21094, National Bureau of Economic Research, Inc.

    More about this item

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • 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
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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