Inflation and Activity: Two Explorations and Their Monetary Policy Implications

29 Pages Posted: 12 Nov 2015 Last revised: 19 Feb 2018

See all articles by Olivier J. Blanchard

Olivier J. Blanchard

National Bureau of Economic Research (NBER); Peterson Institute for International Economics

Eugenio Cerutti

International Monetary Fund (IMF); Johns Hopkins University

Lawrence H. Summers

Harvard University; National Bureau of Economic Research (NBER); Harvard University - Harvard Kennedy School (HKS)

Multiple version iconThere are 4 versions of this paper

Date Written: November 1, 2015

Abstract

We explore two issues triggered by the global financial crisis. First, in most advanced countries, output remains far below the pre-recession trend, suggesting hysteresis. Second, while inflation has decreased, it has decreased less than anticipated, suggesting a breakdown of the relation between inflation and activity. To examine the first, we look at 122 recessions over the past 50 years in 23 countries. We find that a high proportion of them have been followed by lower output or even lower growth. To examine the second, we estimate a Phillips curve relation over the past 50 years for 20 countries. We find that the effect of unemployment on inflation, for given expected inflation, decreased until the early 1990s but has remained roughly stable since then. We draw implications of our findings for monetary policy.

Keywords: Recessions, Hysteresis, Phillips Curve, Monetary Policy

JEL Classification: E31, E32, E50

Suggested Citation

Blanchard, Olivier J. and Cerutti, Eugenio and Summers, Lawrence H., Inflation and Activity: Two Explorations and Their Monetary Policy Implications (November 1, 2015). Peterson Institute for International Economics Working Paper No. 15-19, Available at SSRN: https://ssrn.com/abstract=2689049 or http://dx.doi.org/10.2139/ssrn.2689049

Olivier J. Blanchard (Contact Author)

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Peterson Institute for International Economics ( email )

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Eugenio Cerutti

International Monetary Fund (IMF) ( email )

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Johns Hopkins University ( email )

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Lawrence H. Summers

Harvard University ( email )

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National Bureau of Economic Research (NBER)

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Harvard University - Harvard Kennedy School (HKS) ( email )

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