Inflation and Activity – Two Explorations and Their Monetary Policy Implications

29 Pages Posted: 16 Nov 2015

See all articles by Olivier J. Blanchard

Olivier J. Blanchard

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

Eugenio Cerutti

International Monetary Fund (IMF); Johns Hopkins University

Larry Summers

Harvard University

Multiple version iconThere are 4 versions of this paper

Date Written: November 2015

Abstract

We explore two issues triggered by the 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.

Suggested Citation

Blanchard, Olivier J. and Cerutti, Eugenio and Summers, Larry, Inflation and Activity – Two Explorations and Their Monetary Policy Implications (November 2015). NBER Working Paper No. w21726. Available at SSRN: https://ssrn.com/abstract=2691244

Olivier J. Blanchard (Contact Author)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Peter G. Peterson Institute for International Economics ( email )

1750 Massachusetts Avenue, NW
Washington, DC 20036
United States

Eugenio Cerutti

International Monetary Fund (IMF) ( email )

700 19th Street N.W.
Washington, DC 20431
United States

Johns Hopkins University ( email )

Baltimore, MD 21218
United States

Larry Summers

Harvard University ( email )

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