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Is unemployment helpful in understanding inflation?

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  • Taeyoung Doh

Abstract

The simultaneous decline of core inflation with the increase in the unemployment rate during the recession of 2007-09 has renewed debate about the use of economic slack, such as unemployment, for predicting inflation. Doh examines the relationship between cyclical fluctuations in inflation and unemployment and finds that the relationship varies over time and tends to be stronger and more significant during recessions and early in recoveries than during mature expansions. The empirical results also suggest the trend component of unemployment increases more in a weak recovery than a rapid recovery, resulting in less downward pressure on inflation. Hence, carefully assessing the size of the cyclical component of unemployment is important for understanding inflation dynamics.

Suggested Citation

  • Taeyoung Doh, 2011. "Is unemployment helpful in understanding inflation?," Economic Review, Federal Reserve Bank of Kansas City, vol. 96(Q IV), pages 5-26.
    • Handle: RePEc:fip:fedker:y:2011:i:qiv:p:5-26:n:v.96no.4
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    File URL: https://www.kansascityfed.org/documents/941/2011-Is%20Unemployment%20Helpful%20in%20Understanding%20Inflation%3F%20.pdf
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    References listed on IDEAS

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    5. Todd E. Clark & Taeyoung Doh, 2011. "A Bayesian evaluation of alternative models of trend inflation," Working Papers (Old Series) 1134, Federal Reserve Bank of Cleveland.
    6. James H. Stock & Mark W. Watson, 2007. "Why Has U.S. Inflation Become Harder to Forecast?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(s1), pages 3-33, February.
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    Cited by:

    1. Troy Davig & Michael Redmond, 2014. "Accounting for changes in the U.S. budget deficit," Macro Bulletin, Federal Reserve Bank of Kansas City, pages 1-2, December.

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    Keywords

    Inflation (Finance); Unemployment;

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