INFLATION IN THE G7: MIND THE GAP(S)?

Morley, James and Piger, Jeremy and Rasche, Robert (2015) INFLATION IN THE G7: MIND THE GAP(S)? Macroeconomic Dynamics, 19 (4). pp. 883-912. ISSN 1365-1005

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Abstract

We investigate the importance of trend inflation and the real-activity gap in explaining inflation in G7 countries since 1960. Our analysis is based on a bivariate unobserved components model of inflation and unemployment in which inflation is decomposed into a stochastic trend and a transitory component. As in recent implementations of the New Keynesian Phillips Curve, it is the transitory component of inflation, or “inflation gap,” that is driven by the real-activity gap, which we measure as the deviation of unemployment from its natural rate. We find that both trend inflation and the inflation gap have been consistent and substantial determinants of inflation at business cycle horizons for all G7 countries since 1960. Also, the real-activity gap explains a large fraction of the variation in the inflation gap for each country. These results provide empirical support for the New Keynesian Phillips Curve augmented with trend inflation.

Item Type:
Journal Article
Journal or Publication Title:
Macroeconomic Dynamics
Uncontrolled Keywords:
/dk/atira/pure/subjectarea/asjc/2000/2002
Subjects:
ID Code:
130547
Deposited By:
Deposited On:
14 Jan 2019 16:10
Refereed?:
Yes
Published?:
Published
Last Modified:
16 Sep 2020 05:09