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The effect of inflation on the natural rate of output: experimental evidence

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  • Mary Bange
  • William Bernhard
  • Jim Granato
  • Lauren Jones

Abstract

We examine the inflation-output relationship in the USA for the period 1955-90. We start by replicating Smyth (1992) and subjecting his estimates to a series of diagnostic tests. The model is shown to satisfy conditions for valid inference (weak exogeneity) and policy analysis (super-exogeneity) (Engle, Hendry and Richard, 1983). These robustness checks allow us to study the out-of-sample consequences of the point estimates for various levels of inflation. One central experimental result is that for inflation rates exceeding 4% the natural rate of output is reduced to such an extent that it contributes to a reduction in the growth rate of real GNP that is below historical trend (3.1% in our sample).

Suggested Citation

  • Mary Bange & William Bernhard & Jim Granato & Lauren Jones, 1997. "The effect of inflation on the natural rate of output: experimental evidence," Applied Economics, Taylor & Francis Journals, vol. 29(9), pages 1191-1199.
    • Handle: RePEc:taf:applec:v:29:y:1997:i:9:p:1191-1199
    DOI: 10.1080/00036849700000010
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