[go: up one dir, main page]
IDEAS home Printed from https://ideas.repec.org/a/bde/journl/y2015i11n02.html
   My bibliography  Save this article

Asymmetries in the relationship between inflation and activity

Author

Listed:
  • Luis Julián Álvarez
  • Ana Gómez Loscos
  • Alberto Urtasun
Abstract
Studying changes in the way inflation responds to fluctuations in activity and the possible dependence of this response on the course of the business cycle is of interest as this sensitivity is a key factor in the monetary policy transmission mechanism. Analysing price flexibility is also fundamental to determining the extent to which adjustments to shocks affecting an economy have an impact on activity and employment. Since the introduction of the common currency, inflation in the Spanish economy has behaved in a way that clearly differs depending on the course of the business cycle. Thus, during periods of expansion, demand pressures have caused inflation rates averaging over 2%. The recession that began in 2008 translated into a substantial slowing of the pace at which consumer prices rose in the Spanish economy, with inflation dropping well below 2%, even after stripping out the impact of cheaper oil prices. Consequently, the increase in the CPI excluding unprocessed food and energy prices, corrected for changes in indirect taxation and regulated prices, averaged less than 0.5% in the periods of recession. The slowing of the Spanish inflation rate during the recession is partly explained by the contraction of aggregate demand, although inflation can also be seen to be more sensitive to changes in activity [see Álvarez and Urtasun (2013) and Banco de España (2015)]. This increase in the elasticity of inflation to the degree of slack in the economy is consistent with a reduction in nominal rigidities during periods of crisis, which manifests itself in more frequent price adjustments than in the past. The information from the Banco de España’s survey on wage and price formation offers evidence of this [see Izquierdo and Jimeno (2015)]. According to the survey, the lower nominal rigidity would be mainly attributable to greater variability of demand and a higher level of market competition, together with more frequent price changes by competitors. Most recent empirical evidence from other European economies also suggests that inflation is more sensitive to the point in the business cycle [see Oinonen and Paloviita (2014) and Riggi and Venditti (2015)]. By contrast, a significant number of recent studies on the economy of the United States show inflation to be less sensitive to changes in activity [see Matheson and Stavrev (2013), IMF (2013)]. Moreover, survey data suggest asymmetries exist in the way inflation responds to activity. Thus, Álvarez and Hernando (2007) find that Spanish firms respond more to the falling demand typical of recessions than to increases in expansionary periods. Although this evidence seems to suggest that inflation behaves differently over the course of the economic cycle, there is a shortage of formalised analysis considering this feature. In general, the literature assumes that inflation’s response to activity remains constant, regardless of the point in the cycle. Nevertheless, it is worth exploring the extent to which inflation responds differently in different business cycle phases, and it is also pertinent to assess whether the behaviour of inflation during the current recovery differs from that in other expansionary phases. In this context, this article describes empirical specifications of the relationship between inflation and output that allow the response of prices to changes in activity to be assymmetric over expansionary and recessionary phases, as suggested by Chart 1. Specifically, in the second section various estimates of asymmetric Phillips curves are presented that take into account the effect of inflation expectations on current inflation. The article ends with some concluding remarks.

Suggested Citation

  • Luis Julián Álvarez & Ana Gómez Loscos & Alberto Urtasun, 2015. "Asymmetries in the relationship between inflation and activity," Economic Bulletin, Banco de España, issue NOV, pages 3-9, November.
    • Handle: RePEc:bde:journl:y:2015:i:11:n:02
    as

    Download full text from publisher

    File URL: http://www.bde.es/f/webbde/SES/Secciones/Publicaciones/InformesBoletinesRevistas/BoletinEconomico/15/Nov/Files/be1511-art2e.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Andrea Stella & James H. Stock, 2012. "A state-dependent model for inflation forecasting," International Finance Discussion Papers 1062, Board of Governors of the Federal Reserve System (U.S.).
    2. Gerhard Bry & Charlotte Boschan, 1971. "Cyclical Analysis of Time Series: Selected Procedures and Computer Programs," NBER Books, National Bureau of Economic Research, Inc, number bry_71-1.
    3. Gerhard Bry & Charlotte Boschan, 1971. "Foreword to "Cyclical Analysis of Time Series: Selected Procedures and Computer Programs"," NBER Chapters, in: Cyclical Analysis of Time Series: Selected Procedures and Computer Programs, pages -1, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Álvarez, Luis J. & Sánchez, Isabel, 2019. "Inflation projections for monetary policy decision making," Journal of Policy Modeling, Elsevier, vol. 41(4), pages 568-585.
    2. Juan Carlos Berganza & Pedro del Río & Fructuoso Borrallo, 2016. "Determinants and implications of low global inflation rates," Occasional Papers 1608, Banco de España.
    3. Luis J. Álvarez & Isabel Sánchez, 2017. "A suite of inflation forecasting models," Occasional Papers 1703, Banco de España.
    4. khan, sajawal, 2018. "Managing the Expectations and Monetary Policy effectiveness: Role of Inflation Targeting," MPRA Paper 93170, University Library of Munich, Germany, revised 20 Feb 2019.
    5. Ciccarelli, Matteo & Osbat, Chiara, 2017. "Low inflation in the euro area: Causes and consequences," Occasional Paper Series 181, European Central Bank.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. J. Cuñado & L. Gil-Alana & F. Gracia, 2009. "US stock market volatility persistence: evidence before and after the burst of the IT bubble," Review of Quantitative Finance and Accounting, Springer, vol. 33(3), pages 233-252, October.
    2. Harding, Don & Pagan, Adrian, 2011. "An Econometric Analysis of Some Models for Constructed Binary Time Series," Journal of Business & Economic Statistics, American Statistical Association, vol. 29(1), pages 86-95.
    3. Aastveit, Knut Are & Jore, Anne Sofie & Ravazzolo, Francesco, 2016. "Identification and real-time forecasting of Norwegian business cycles," International Journal of Forecasting, Elsevier, vol. 32(2), pages 283-292.
    4. Chun-Chang Lee & Chih-Min Liang & Hsing-Jung Chou, 2013. "Identifying Taiwan real estate cycle turning points- An application of the multivariate Markov-switching autoregressive Model," Advances in Management and Applied Economics, SCIENPRESS Ltd, vol. 3(2), pages 1-1.
    5. Agnello, Luca & Nerlich, Carolin, 2012. "On the severity of economic downturns: Lessons from cross-country evidence," Economics Letters, Elsevier, vol. 117(1), pages 149-155.
    6. Mr. Thomas Helbling & Mr. Tamim Bayoumi, 2003. "Are they All in the Same Boat? the 2000-2001 Growth Slowdown and the G-7 Business Cycle Linkages," IMF Working Papers 2003/046, International Monetary Fund.
    7. Ghoshray, Atanu, 2021. "Are coffee farmers worse off in the long run?," 95th Annual Conference, March 29-30, 2021, Warwick, UK (Hybrid) 311084, Agricultural Economics Society - AES.
    8. Theobald, Thomas, 2013. "Markov Switching with Endogenous Number of Regimes and Leading Indicators in a Real-Time Business Cycle Forecast," VfS Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79911, Verein für Socialpolitik / German Economic Association.
    9. M.S.Rafiq, 2006. "Business Cycle Moderation - Good Policies or Good Luck: Evidence and Explanations for the Euro Area," Discussion Paper Series 2006_21, Department of Economics, Loughborough University.
    10. Sergey V. Smirnov & Nikolay V. Kondrashov & Anna V. Petronevich, 2017. "Dating Cyclical Turning Points for Russia: Formal Methods and Informal Choices," Journal of Business Cycle Research, Springer;Centre for International Research on Economic Tendency Surveys (CIRET), vol. 13(1), pages 53-73, May.
    11. Pablo García S. & Camilo Pérez N., 2017. "Desigualdad, inflación, ciclos y crisis en Chile," Estudios de Economia, University of Chile, Department of Economics, vol. 44(2 Year 20), pages 185-221, December.
    12. Viviana Alejandra Alfonso & Luis Eduardo Arango Thomas & Fernando Arias & José David Pulido, 2011. "Ciclos de negocios en Colombia: 1980-2010," Borradores de Economia 8328, Banco de la Republica.
    13. Grigoraş, Veaceslav & Stanciu, Irina Eusignia, 2016. "New evidence on the (de)synchronisation of business cycles: Reshaping the European business cycle," International Economics, Elsevier, vol. 147(C), pages 27-52.
    14. Vitor Castro, 2015. "The Portuguese business cycle: chronology and duration dependence," Empirical Economics, Springer, vol. 49(1), pages 325-342, August.
    15. Rachel Male, 2010. "Developing Country Business Cycles: Characterising the Cycle," Working Papers 663, Queen Mary University of London, School of Economics and Finance.
    16. Avouyi-Dovi, S. & Matheron, J., 2003. "Interactions between business cycles, stock market cycles and interest rates: the stylised facts," Financial Stability Review, Banque de France, issue 3, pages 80-99, November.
    17. Yongsung Chang & Sunoong Hwang, 2015. "Asymmetric Phase Shifts in U.S. Industrial Production Cycles," The Review of Economics and Statistics, MIT Press, vol. 97(1), pages 116-133, March.
    18. Pami Dua & Anirvan Banerji, 2011. "Predicting Recessions and Slowdowns: A Robust Approach," Working Papers id:4391, eSocialSciences.
    19. Fatma Erdem & Erdal Özmen, 2015. "Exchange Rate Regimes and Business Cycles: An Empirical Investigation," Open Economies Review, Springer, vol. 26(5), pages 1041-1058, November.
    20. Calderón, César & Fuentes, J. Rodrigo, 2014. "Have business cycles changed over the last two decades? An empirical investigation," Journal of Development Economics, Elsevier, vol. 109(C), pages 98-123.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bde:journl:y:2015:i:11:n:02. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Ángel Rodríguez. Electronic Dissemination of Information Unit. Research Department. Banco de España (email available below). General contact details of provider: https://edirc.repec.org/data/bdegves.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.