Inflation and the steeplechase between economic activity variables: evidence for G7 countries

Abstract

A sharp increase in unemployment accompanied by a relatively muted response of inflation during the Great Recession and a consecutive inflationless recovery cast further doubts on the very existence of the Phillips curve as a systemic relation between real activity and inflation. With the aid of dynamic model averaging, this paper aims to highlight that this relation resurfaces if (i) inflationary pressures are captured by a richer set of real activity measures, and (ii) one accounts for the existence of a non-linear response of inflation to the driving variable. Based on data for the US and other G7 countries, our results show that the relation between economic activity and inflation is quite sturdy when one allows for more complex assessment of the former. We find that measures of economic activity describe inflation developments to a varying degree across time and space. This can blur the picture of inflation–real economy comovements in models where only a single variable of economic activity is considered. The output gap is often outperformed by unemployment-related variables. Our results also confirm a weakening of the inflation–activity relationship (i.e. a flattening of the Phillips curve) in the last decade that is robust both across activity measures and across countries.

Analysis of Substitution Changes in the Phillips Curve in V4 Countries Over the Course of Economic Cycles

“…Consistency of output and inflation in relation to the frequency of the business cycle is in the range of 0.6 to 0.9. Baxa, Plašil, and Vašíček (2013) apply dynamic dynamics modeling (DMA) to confirm the systematic relationship between real activity and inflation. Zhang (2017) transcribes the basic inflation dynamics model as an expanded form of a conventional PC, to which it adds, besides the domestic production gap, also foreign.…”

How the Czech Government Got the Pandemic Wrong

“…The long history of the relationship between inflation and unemployment confirms its applicability to the analysis of economic problems, despite strong criticism of this approach, especially in the last third of the 20th century. The applicability of the Phillips curve (PC) and NAIRU concepts is also supported by authors dealing with the effects of the global recession until 2015 (Gordon, 2013;Coibion and Gorodnichenko, 2015;Rusticelli, 2014;Andrle, Brůha and Solmaz, 2013;Baxa, Plašil and Vašíček, 2013). Further research from 2016 to 2020, examining the aftermath of a global recession, also confirms the functionality of both concepts (Blanchard, 2016;McLeay and Tenreyro, 2019;Zandweghe, 2019, Stock andWatson, 2017;D.…”

Phillips Curve During the Economic Cycle in the Czech Republic and Poland in the Years 2000 to 2016

“…The strong relationship between output and inflation demonstrates the great importance of demand shocks for the euro area economic cycle. Baxa, Plašil and Vašíček (2013) oppose this on data from the USA and the G7 countries in the period from the 1st quarter of 1995 to the 2nd quarter of 2013, when they found that the relationship between economic activity and inflation is relatively robust only when using more complex forms of measurement. Baxa, Plašil and Vašíček (2013) oppose this, when they use data from the USA and the G7 countries in the period from the Q1 1995 to the Q2 2013, when they found that the relationship between economic activity and inflation is relatively strong only when using more complex forms of measurement.…”

“…Baxa, Plašil and Vašíček (2013) oppose this on data from the USA and the G7 countries in the period from the 1st quarter of 1995 to the 2nd quarter of 2013, when they found that the relationship between economic activity and inflation is relatively robust only when using more complex forms of measurement. Baxa, Plašil and Vašíček (2013) oppose this, when they use data from the USA and the G7 countries in the period from the Q1 1995 to the Q2 2013, when they found that the relationship between economic activity and inflation is relatively strong only when using more complex forms of measurement. In the last decade, however, the use of all methods across all countries has weakened this relationship (socalled flattening of the PC), which may be due to structural changes in the economy and monetary policy.…”