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Michael Kiley
 
''The lead of output over inflation in sticky price models''
( 2002, Vol. 5 No.5 )
 
 
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:
JEL: E0 - Macroeconomics and Monetary Economics: General
E3 - Prices, Business Fluctuations, and Cycles: General (includes Measurement and Data)
 
Manuscript Received : Aug 28 2002 Manuscript Accepted : Aug 28 2002

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