An Empirical Analysis of Inflation in OECD Countries

62 Pages Posted: 24 Jul 2003  

Jane E. Ihrig

Federal Reserve Board - International Financial Transactions

Jaime Marquez

Board of Governors of the Federal Reserve System - International Financial Transactions Section

Date Written: May 2003

Abstract

One of the most remarkable macroeconomic developments of the past decade has been the widespread decline in inflation despite declines in unemployment rates. For the United States, these seemingly contradictory developments have been reconciled in terms of three factors: (1) an acceleration in productivity, (2) structural changes in labor markets that lowered the natural unemployment rate (NAIRU), and (3) improved credibility of monetary policy. Here we ask whether comparable factors were at work in foreign industrial countries. To address this question, we empirically characterize the relationship between inflation, the unemployment rate, and structural factors using an extended Phillips curve model with quarterly data through 1994. By undertaking counterfactual simulations from 1995 to 2001, we quantify the separate contributions of unemployment-rate movements, labor-market reforms (that affected the NAIRU), and productivity developments on inflation. In line with previous work on the United States, we find that productivity advancements were the main structural factor reducing inflation in the United States. For foreign countries, persistent labor-market slack was the main factor exerting downward pressure on inflation. This persistence stemmed, in part, from structural reforms that lowered the NAIRU while the unemployment rate was declining.

Keywords: Phillips Cruve, unemployment, NAIRU, labor productivity, policy credibility, model simulations

JEL Classification: C22, C53, E17, E37

Suggested Citation

Ihrig, Jane E. and Marquez, Jaime, An Empirical Analysis of Inflation in OECD Countries (May 2003). FRB International Finance Discussion Paper No. 765. Available at SSRN: https://ssrn.com/abstract=415443 or http://dx.doi.org/10.2139/ssrn.415443

Jane E. Ihrig

Federal Reserve Board - International Financial Transactions ( email )

20th and C Streets, NW
Washington, DC 20551
United States
202-452-3372 (Phone)
202-736-5638 (Fax)

Jaime Marquez (Contact Author)

Board of Governors of the Federal Reserve System - International Financial Transactions Section ( email )

20th and C Streets, NW
Washington, DC 20551
United States

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