IDEAS home Printed from https://ideas.repec.org/a/oup/ecinqu/v41y2003i3p392-406.html
   My bibliography  Save this article

Why Is Inflation Low When Productivity Growth Is High?

Author

Listed:
  • Michael T. Kiley

Abstract

Inflation has been low when productivity growth has been high. This occurs because the Federal Reserve has not adjusted nominal income growth in response to changes in productivity growth, implying that an acceleration in trend productivity growth leads to a deceleration in inflation. The model's predictions are confirmed: (1) Inflation should fall when trend productivity growth rises, and (2) nominal income and wage growth should not change with trend productivity. The model also implies that productivity growth enters a Phillips curve relationship as a proxy for inflation expectations. Thus, estimates of the NAIRU should fall when productivity growth accelerates. (JEL E31, E50, E52) Copyright 2003, Oxford University Press.

Suggested Citation

  • Michael T. Kiley, 2003. "Why Is Inflation Low When Productivity Growth Is High?," Economic Inquiry, Western Economic Association International, vol. 41(3), pages 392-406, July.
    • Handle: RePEc:oup:ecinqu:v:41:y:2003:i:3:p:392-406
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1093/ei/cbg016
    Download Restriction: Access to full text is restricted to subscribers.
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. John B. Taylor, 1999. "Introduction to "Monetary Policy Rules"," NBER Chapters, in: Monetary Policy Rules, pages 1-14, National Bureau of Economic Research, Inc.
    2. D. Grubb & R. Jackman & R. Layard, 1982. "Causes of the Current Stagflation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 49(5), pages 707-730.
    3. Orphanides, Athanasios, 2003. "The quest for prosperity without inflation," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 633-663, April.
    4. Steven Braun, 1984. "Productivity and the NIIRU (and other Phillips curve issues)," Working Paper Series / Economic Activity Section 34, Board of Governors of the Federal Reserve System (U.S.).
    5. Laurence Ball & N. Gregory Mankiw, 2002. "The NAIRU in Theory and Practice," Journal of Economic Perspectives, American Economic Association, vol. 16(4), pages 115-136, Fall.
    6. Kiley, Michael T, 2000. "Endogenous Price Stickiness and Business Cycle Persistence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(1), pages 28-53, February.
    7. Hamilton, James D, 2001. "A Parametric Approach to Flexible Nonlinear Inference," Econometrica, Econometric Society, vol. 69(3), pages 537-573, May.
    8. McCallum, Bennett T. & Nelson, Edward, 1999. "Nominal income targeting in an open-economy optimizing model," Journal of Monetary Economics, Elsevier, vol. 43(3), pages 553-578, June.
    9. John B. Taylor, 1999. "A Historical Analysis of Monetary Policy Rules," NBER Chapters, in: Monetary Policy Rules, pages 319-348, National Bureau of Economic Research, Inc.
    10. Lucas, Robert E, Jr, 1973. "Some International Evidence on Output-Inflation Tradeoffs," American Economic Review, American Economic Association, vol. 63(3), pages 326-334, June.
    11. Arthur J. Rolnick & Warren E. Weber, 1998. "Money, inflation, and output under fiat and commodity standards," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 22(Spr), pages 11-17.
    12. James Tobin, 1980. "Stabilization Policy Ten Years After," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 11(1, Tenth ), pages 19-90.
    13. Gerald P. Dwyer & Rik Hafer, 1999. "Are money growth and inflation still related?," Economic Review, Federal Reserve Bank of Atlanta, vol. 84(Q2), pages 32-43.
    14. Ireland, Peter N., 1999. "Does the time-consistency problem explain the behavior of inflation in the United States?," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 279-291, October.
    15. Meade, James E, 1993. "The Meaning of "Internal Balance."," American Economic Review, American Economic Association, vol. 83(6), pages 3-9, December.
    16. Christina D. Romer & David H. Romer, 1997. "Reducing Inflation: Motivation and Strategy," NBER Books, National Bureau of Economic Research, Inc, number rome97-1.
    17. Lucas, Robert E, Jr, 1996. "Nobel Lecture: Monetary Neutrality," Journal of Political Economy, University of Chicago Press, vol. 104(4), pages 661-682, August.
    18. Laurence Ball & N. Gregory Mankiw & David Romer, 1988. "The New Keynsesian Economics and the Output-Inflation Trade-off," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 1-82.
    19. Joseph Stiglitz, 1997. "Reflections on the Natural Rate Hypothesis," Journal of Economic Perspectives, American Economic Association, vol. 11(1), pages 3-10, Winter.
    20. Robert J. Gordon, 1998. "Foundations of the Goldilocks Economy: Supply Shocks and the Time-Varying NAIRU," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(2), pages 297-346.
    21. Ray C. Fair, 2001. "Actual Federal Reserve policy behavior and interest rate rules," Economic Policy Review, Federal Reserve Bank of New York, issue Mar, pages 61-72.
    22. Douglas Staiger & James H. Stock & Mark W. Watson, 2001. "Prices, Wages and the U.S. NAIRU in the 1990s," NBER Working Papers 8320, National Bureau of Economic Research, Inc.
    23. John B. Taylor, 1999. "Monetary Policy Rules," NBER Books, National Bureau of Economic Research, Inc, number tayl99-1.
    24. Olivier Jean Blanchard & Stanley Fischer, 1989. "Lectures on Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262022834, April.
    25. J. Bradford DeLong, 1997. "America's Peacetime Inflation: The 1970s," NBER Chapters, in: Reducing Inflation: Motivation and Strategy, pages 247-280, National Bureau of Economic Research, Inc.
    26. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
    27. Gerald P. Dwyer & Rik Hafer, 1988. "Is money irrelevant?," Review, Federal Reserve Bank of St. Louis, issue May, pages 3-17.
    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. Christian Pierdzioch & Jan-Christoph Rülke & Peter Tillmann, 2013. "Using forecasts to uncover the loss function of FOMC members," MAGKS Papers on Economics 201302, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    2. Tesfaselassie, Mewael F., 2014. "Trend growth and learning about monetary policy rules," Journal of Economic Dynamics and Control, Elsevier, vol. 41(C), pages 241-256.
    3. William T. Gavin & Benjamin D. Keen & Alexander W. Richter & Nathaniel A. Throckmorton, 2013. "Global Dynamics at the Zero Lower Bound," Auburn Economics Working Paper Series auwp2013-17, Department of Economics, Auburn University.
    4. Miles S. Kimball & John G. Fernald & Susanto Basu, 2006. "Are Technology Improvements Contractionary?," American Economic Review, American Economic Association, vol. 96(5), pages 1418-1448, December.
    5. Gavin, William T. & Keen, Benjamin D. & Richter, Alexander W. & Throckmorton, Nathaniel A., 2015. "The zero lower bound, the dual mandate, and unconventional dynamics," Journal of Economic Dynamics and Control, Elsevier, vol. 55(C), pages 14-38.
    6. Meijers, Huub, 2006. "Diffusion of the Internet and low inflation in the information economy," Information Economics and Policy, Elsevier, vol. 18(1), pages 1-23, March.
    7. William T. Gavin & Benjamin D. Keen & Michael R. Pakko, 2009. "Taylor-type rules and permanent shifts in productivity growth," Working Papers 2009-049, Federal Reserve Bank of St. Louis.

    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. Orphanides, Athanasios, 2004. "Monetary Policy Rules, Macroeconomic Stability, and Inflation: A View from the Trenches," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(2), pages 151-175, April.
    2. Hendrickson, Joshua R., 2012. "An overhaul of Federal Reserve doctrine: Nominal income and the Great Moderation," Journal of Macroeconomics, Elsevier, vol. 34(2), pages 304-317.
    3. Orphanides, Athanasios, 2003. "The quest for prosperity without inflation," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 633-663, April.
    4. Wollmershauser, Timo, 2006. "Should central banks react to exchange rate movements? An analysis of the robustness of simple policy rules under exchange rate uncertainty," Journal of Macroeconomics, Elsevier, vol. 28(3), pages 493-519, September.
    5. Laurence Ball & N. Gregory Mankiw, 2002. "The NAIRU in Theory and Practice," Journal of Economic Perspectives, American Economic Association, vol. 16(4), pages 115-136, Fall.
    6. Akhand Akhtar Hossain, 2009. "Central Banking and Monetary Policy in the Asia-Pacific," Books, Edward Elgar Publishing, number 12777.
    7. Peter Isard & Douglas Laxton & Ann-Charlotte Eliasson, 1999. "Simple Monetary Policy Rules Under Model Uncertainty," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 6(4), pages 537-577, November.
    8. Wieland, Volker & Cwik, Tobias & Müller, Gernot J. & Schmidt, Sebastian & Wolters, Maik, 2012. "A new comparative approach to macroeconomic modeling and policy analysis," Journal of Economic Behavior & Organization, Elsevier, vol. 83(3), pages 523-541.
    9. Athanasios Orphanides & Simon van Norden, 2002. "The Unreliability of Output-Gap Estimates in Real Time," The Review of Economics and Statistics, MIT Press, vol. 84(4), pages 569-583, November.
    10. Cecion, Martina & Coenen, Günter & Gerke, Rafael & Le Bihan, Hervé & Motto, Roberto & Aguilar, Pablo & Ajevskis, Viktors & Giesen, Sebastian & Albertazzi, Ugo & Gilbert, Niels & Al-Haschimi, Alexander, 2021. "The ECB’s price stability framework: past experience, and current and future challenges," Occasional Paper Series 269, European Central Bank.
    11. Daniel Kienzler & Kai D. Schmid, 2014. "Hysteresis in Potential Output and Monetary Policy," Scottish Journal of Political Economy, Scottish Economic Society, vol. 61(4), pages 371-396, September.
    12. Robert G. King, 2000. "The new IS-LM model : language, logic, and limits," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 45-103.
    13. Schmidt, Sebastian & Wieland, Volker, 2013. "The New Keynesian Approach to Dynamic General Equilibrium Modeling: Models, Methods and Macroeconomic Policy Evaluation," Handbook of Computable General Equilibrium Modeling, in: Peter B. Dixon & Dale Jorgenson (ed.), Handbook of Computable General Equilibrium Modeling, edition 1, volume 1, chapter 0, pages 1439-1512, Elsevier.
    14. Athanasios Orphanides, 2000. "Activist stabilization policy and inflation: the Taylor rule in the 1970s," Finance and Economics Discussion Series 2000-13, Board of Governors of the Federal Reserve System (U.S.).
    15. Haider Ali & Eatzaz Ahmad, 2014. "Choice of Monetary Policy Instrument under Targeting Regimes in a Simple Stochastic Macro Model," PIDE-Working Papers 2014:102, Pakistan Institute of Development Economics.
    16. Frederick H. Wallace & Gary L. Shelley & Luis F. Cabrera Castellanos, 2004. "Pruebas de la neutralidad monetaria a largo plazo: el caso de Nicaragua," Monetaria, CEMLA, vol. 0(4), pages 407-418, octubre-d.
    17. Batini, Nicoletta & Harrison, Richard & Millard, Stephen P., 2003. "Monetary policy rules for an open economy," Journal of Economic Dynamics and Control, Elsevier, vol. 27(11-12), pages 2059-2094, September.
    18. Pär Österholm, 2005. "The Taylor Rule: A Spurious Regression?," Bulletin of Economic Research, Wiley Blackwell, vol. 57(3), pages 217-247, July.
    19. Mehra, Yash P., 2002. "Level and growth policy rules and actual Fed policy since 1979," Journal of Economics and Business, Elsevier, vol. 54(6), pages 575-594.
    20. Trehan, Bharat & Wu, Tao, 2007. "Time-varying equilibrium real rates and monetary policy analysis," Journal of Economic Dynamics and Control, Elsevier, vol. 31(5), pages 1584-1609, May.

    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

    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:oup:ecinqu:v:41:y:2003:i:3:p:392-406. 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: Oxford University Press (email available below). General contact details of provider: https://edirc.repec.org/data/weaaaea.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.