Publication detail

Inflation and the Steeplechase Between Economic Activity Variables

Author(s): PhDr. Jaromír Baxa Ph.D., Plašil, Miroslav; Vašíček, Bořek
Type: Articles in journals with impact factor
Year: 2016
Number: 0
ISSN / ISBN: 1935-1690
Published in: The B.E. Journal of Macroeconomics
Publishing place:
Keywords: dynamic model averaging; inflation dynamics; Phillips curve; real economic activity
JEL codes:
Suggested Citation: Baxa, Jaromír, Miroslav Plašil, and Bořek Vašíček. "Inflation and the steeplechase between economic activity variables: evidence for G7 countries." The BE Journal of Macroeconomics. DOI: 10.1515/bejm-2015-0155, October 2016
Grants: DYME – Dynamic Models in Economics
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.

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