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The B.E. Journal of Macroeconomics

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

Jaromír Baxa
  • Charles University, Institute of Economic Studies, Prague, Czechia
  • Institute of Information Theory and Automation AS CR, Prague, Czechia
  • Other articles by this author:
  • De Gruyter OnlineGoogle Scholar
/ Miroslav Plašil
  • Czech National Bank – Financial Stability Department, Prague, Czechia
  • University of Economics, Prague, Czechia
  • Other articles by this author:
  • De Gruyter OnlineGoogle Scholar
/ Bořek Vašíček
  • Corresponding author
  • Czech National Bank – Economic Research Department, Prague, Czechia
  • European Commission – DG Economic and Financial Affairs, Brussels, Belgium
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Published Online: 2016-10-18 | DOI: https://doi.org/10.1515/bejm-2015-0155

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.

Keywords: dynamic model averaging; inflation dynamics; Phillips curve; real economic activity

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About the article

Published Online: 2016-10-18


Citation Information: The B.E. Journal of Macroeconomics, ISSN (Online) 1935-1690, ISSN (Print) 2194-6116, DOI: https://doi.org/10.1515/bejm-2015-0155.

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