Mind the Output Gap: The Disconnect of Growth and Inflation during Recessions and Convex Phillips Curves in the Euro Area

Gross M, Semmler W (2019)
Oxford Bulletin of Economics and Statistics 81(4): 817-848.

Zeitschriftenaufsatz | Veröffentlicht | Englisch
 
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Autor/in
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Abstract / Bemerkung
We develop a theoretical model that features a business cycle-dependent relation between output, price inflation and inflation expectations, augmenting the model by Svensson (1997) with a nonlinear Phillips curve that reflects the rationale underlying the capacity constraint theory (Macklem, 1997). The theoretical model motivates our empirical assessment, based on a regime-switching Phillips curve and a regime-switching monetary structural VAR, employing different filter-based, semi-structural model-based and Bayesian factor model-implied output gaps. The analysis confirms the presence of a convex relationship between inflation and the output gap, meaning that the coefficient in the Phillips curve on the output gap recurringly increases during times of expansion and abates during recessions. Sign-restricted monetary policy shocks based on a regime-switching monetary SVAR reveal that expansionary monetary policy induces less pressure on inflation at times of weak as opposed to strong growth; thereby rationalizing relatively stronger expansionary policy, including unconventional volume-based policy, during times of deep recession. A further augmented model shows that an effective euro exchange rate shock, too, implies business cycle state-dependent responses, with more upward pressure on prices arising from unexpected currency depreciation at times of expansion than during recession phases.
Erscheinungsjahr
2019
Zeitschriftentitel
Oxford Bulletin of Economics and Statistics
Band
81
Ausgabe
4
Seite(n)
817-848
ISSN
0305-9049
eISSN
1468-0084
Page URI
https://pub.uni-bielefeld.de/record/2936928

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Gross M, Semmler W. Mind the Output Gap: The Disconnect of Growth and Inflation during Recessions and Convex Phillips Curves in the Euro Area. Oxford Bulletin of Economics and Statistics . 2019;81(4):817-848.
Gross, M., & Semmler, W. (2019). Mind the Output Gap: The Disconnect of Growth and Inflation during Recessions and Convex Phillips Curves in the Euro Area. Oxford Bulletin of Economics and Statistics , 81(4), 817-848. doi:10.1111/obes.12291
Gross, M., and Semmler, W. (2019). Mind the Output Gap: The Disconnect of Growth and Inflation during Recessions and Convex Phillips Curves in the Euro Area. Oxford Bulletin of Economics and Statistics 81, 817-848.
Gross, M., & Semmler, W., 2019. Mind the Output Gap: The Disconnect of Growth and Inflation during Recessions and Convex Phillips Curves in the Euro Area. Oxford Bulletin of Economics and Statistics , 81(4), p 817-848.
M. Gross and W. Semmler, “Mind the Output Gap: The Disconnect of Growth and Inflation during Recessions and Convex Phillips Curves in the Euro Area”, Oxford Bulletin of Economics and Statistics , vol. 81, 2019, pp. 817-848.
Gross, M., Semmler, W.: Mind the Output Gap: The Disconnect of Growth and Inflation during Recessions and Convex Phillips Curves in the Euro Area. Oxford Bulletin of Economics and Statistics . 81, 817-848 (2019).
Gross, Marco, and Semmler, Willi. “Mind the Output Gap: The Disconnect of Growth and Inflation during Recessions and Convex Phillips Curves in the Euro Area”. Oxford Bulletin of Economics and Statistics 81.4 (2019): 817-848.