The Lead of Output Over Inflation in Sticky Price Models

Board of Governors of the Federal Reserve System Finance and Econ. Disc. Papers 96-33

Posted: 14 Oct 1996

See all articles by Michael T. Kiley

Michael T. Kiley

Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: August 19, 1996

Abstract

Output growth is negatively correlated with inflation and detrended output is positively correlated with inflation in the major North American and European economies. In addition, 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. These results reveal that the recent burst of researchers using the partial adjustment model will find a larger role for supply shocks than alternative models of price rigidity.

JEL Classification: E32, E31

Suggested Citation

Kiley, Michael T., The Lead of Output Over Inflation in Sticky Price Models (August 19, 1996). Board of Governors of the Federal Reserve System Finance and Econ. Disc. Papers 96-33. Available at SSRN: https://ssrn.com/abstract=3401

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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