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Slack and Cyclically Sensitive Inflation
Author(s) -
STOCK JAMES H.,
WATSON MARK W.
Publication year - 2020
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/jmcb.12757
Subject(s) - inflation (cosmology) , economics , econometrics , index (typography) , measure (data warehouse) , phillips curve , construct (python library) , output gap , flattening , component (thermodynamics) , monetary economics , monetary policy , physics , computer science , thermodynamics , database , astronomy , theoretical physics , world wide web , programming language
We investigate the flattening Phillips relation by making two departures from standard specifications. First, we measure slack using real activity variables that are bandpass filtered or year‐over‐year changes in activity (these are similar), instead of gaps. Second, we study the components of inflation instead of the standard aggregates. We find that some inflation components have strong and stable correlations with the cyclical component of real activity; these components tend to be relatively well‐measured and domestically determined. Other components, typically prices that are poorly measured or internationally determined, have weak and/or unstable correlations with cyclical activity. We construct a new inflation index, cyclically sensitive inflation, that weights the components by their joint cyclical covariation with real activity. The index has strong and stable correlations with cyclical activity and provides a real‐time measure of cyclical movements in inflation.