How Does Slack Influence Inflation?
7 Pages Posted: 27 Jul 2011
Date Written: July 1, 2011
Abstract
Economists have long studied the relationship between resource utilization and inflation. Theory suggests that when firms use labor and capital very intensively, production costs tend to rise and firms have more scope to pass those cost increases along in the form of higher product prices. In contrast, when that level of intensity is relatively low - that is, when the economy is operating with slack - production costs tend to rise more slowly (or even fall) and firms have less scope for raising prices. Empirical evidence, however, has varied concerning the exact nature of the relationship between resource utilization and inflation. In this study, the authors reexamine this relationship by evaluating the presence of “threshold effects.” They find that the level of intensity of resource utilization must be below or above certain critical values before it can help to forecast movements in inflation.
Keywords: Phillips curve, Economic slack
JEL Classification: A10, E52
Suggested Citation: Suggested Citation
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