The Lead of Output Over Inflation in Sticky Price Models

Economics Bulletin, Vol. 5, No. 5, pp. 1-7, August 2002

Posted: 8 Sep 2003

See all articles by Michael T. Kiley

Michael T. Kiley

Board of Governors of the Federal Reserve System

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Abstract

Output growth is negatively correlated with inflation, detrended output is positively correlated with inflation, and output growth and detrended output lead inflation. I explore the consistency of these correlations with three models of price adjustment: the partial adjustment model, a staggered price setting model, and the P-bar model. The ratio of the variance of supply to demand shocks necessary to match the pattern of output-inflation correlations can be ranked across the three models; the P-Bar model requires the lowest ratio, and the partial adjustment model requires the highest ratio. The imperfect information aspects of staggered price setting and the P-bar model drive some of the output/inflation nexus, highlighting a link with the tradition from Hume to Lucas to recent work by Mankiw and Reis.

Keywords: P-bar Model, Output/Inflation Correlation, Partial Adjustment (Calvo Model), Phase Shift, Staggered Price Setting

JEL Classification: E3

Suggested Citation

Kiley, Michael T., The Lead of Output Over Inflation in Sticky Price Models. Economics Bulletin, Vol. 5, No. 5, pp. 1-7, August 2002. Available at SSRN: https://ssrn.com/abstract=326920

Michael T. Kiley (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th and C Streets, NW
Washington, DC 20551
United States
202-452-2448 (Phone)
202-452-5296 (Fax)

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