Inflation, slack, and Fed credibility
Abstract: It is generally agreed that slack has some impact on inflation. There is much less agreement on what form the relationship takes and whether it is stable enough to reliably help predict inflation. This analysis focuses on the Great Moderation period. We find that slack (as measured by the unemployment rate) and changes in slack are negatively correlated with changes in inflation and also deviations of inflation from long-forward inflation expectations.> ; These relationships could have been exploited to produce forecasts of trimmed mean PCE inflation more accurate than rule-of-thumb forecasts. Forecasts of trimmed mean PCE inflation also serve well as predictions of GDP inflation and headline PCE inflation. Our analysis suggests that currently high levels of slack should hold inflation below two percent over 2012.
File(s): File format is application/pdf http://www.dallasfed.org/assets/documents/research/staff/staff1201.pdf
Provider: Federal Reserve Bank of Dallas
Part of Series: Staff Papers
Publication Date: 2012