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The inflation-output trade-off: Is the Phillips Curve symmetric? A policy lesson from New Zealand

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Abstract

New Zealand data show that the inflation-output relationship is asymmetric. This asymmetry implies that positive demand shocks tend to increase inflation by more than negative demand shocks of similar magnitudes reduce it. An important implication of this asymmetry is that a monetary authority with the objective of maintaining the inflation rate within a narrow band needs to react more promptly to demand shocks than otherwise be necessary. Alternatively, policy that is slow to respond to demand disturbances will result in higher inflation, and greater losses of output than would be the case with a linear Phillips curve.

Suggested Citation

  • Weshah Razzak, 1997. "The inflation-output trade-off: Is the Phillips Curve symmetric? A policy lesson from New Zealand," Reserve Bank of New Zealand Discussion Paper Series G97/2, Reserve Bank of New Zealand.
  • Handle: RePEc:nzb:nzbdps:1997/02
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    File URL: http://www.rbnz.govt.nz/-/media/ReserveBank/Files/Publications/Discussion%20papers/1997/g97-2.pdf
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    References listed on IDEAS

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    Cited by:

    1. Kilponen, Juha & Mayes, David & Vilmunen, Jouko, 1999. "Labour Market Flexibility in Northern Europe," ERSA conference papers ersa99pa088, European Regional Science Association.
    2. Sadaf Zafar & Attiya Yasmin Javid, 2015. "Evaluation of Gold Investment as an Inflationary Hedge in Case of Pakistan," PIDE-Working Papers 2015:118, Pakistan Institute of Development Economics.
    3. David Mayes & Matti Viren, 2002. "Asymmetry and the Problem of Aggregation in the Euro Area," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 29(1), pages 47-73, March.
    4. Mayes, David & Virén, Matti, 2004. "Asymmetries in the Euro area economy," Research Discussion Papers 9/2004, Bank of Finland.
    5. Grant Spencer & Ozer Karagedikli, 2006. "Modelling for monetary policy: the New Zealand experience," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 69, pages 1-8., June.
    6. Economics Department, 1996. "Economics Department research over the past year: a review," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 59, September.
    7. Iris Claus, 2000. "Is the output gap a useful indicator of inflation?," Reserve Bank of New Zealand Discussion Paper Series DP2000/05, Reserve Bank of New Zealand.
    8. Francisco Nadal De Simone, 2001. "Inflation Forecasting in Chile," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 4(3), pages 59-85, December.
    9. Rizki E. Wimanda & Paul M. Turner & Maximilian J. B. Hall, 2013. "The shape of the Phillips curve: the case of Indonesia," Applied Economics, Taylor & Francis Journals, vol. 45(29), pages 4114-4121, October.
    10. Mayes, David G. & Vilmunen, Jouko, 1999. "Unemployment in a small open economy : Finland and New Zealand," Research Discussion Papers 10/1999, Bank of Finland.

    More about this item

    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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