Global Slack as a Determinant of US Inflation

Abstract

Resource utilisation, or “slack”, is widely held to be an important determinant of inflation dynamics. As the world has become more globalised in recent decades, some have argued that the relevant concept of slack should be global rather than domestic (the “global slack hypothesis”). This line of argument is consistent with standard New Keynesian theory. However, the empirical evidence is, at best, fragile possibly because of a disconnect between empirical and theory-consistent measures of output gaps.

Full publication: Globalisation and Inflation Dynamics in Asia and the Pacific

Keywords: Global slack, open-economy Phillips curve, inflation

JEL Classification: E3, F4