Inflation and Activity – Two Explorations and their Monetary Policy Implications

Olivier Jean Blanchard · Eugenio Cerutti · Lawrence H. Summers

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Monetary Policy and Economic Impact Economic Theory and Policy Unemployment and Economic Growth

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.

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References

2009The Aftermath of Financial Crises 2002Dissecting the cycle: a methodological investigation 2008Growth Dynamics: The Myth of Economic Recovery 2013Systemic Banking Crises Database 2020Systemic Banking Crises Database II 1986Hysteresis and the European Unemployment Problem 2006Medium-Term Business Cycles 2015Is the Phillips Curve Alive and Well after All? Inflation Expectations and the Missing Disinflation

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