Is there an inflation puzzle?

A study investigates whether compensation growth has played a role in inflation's failure to accelerate despite 6 years of continuing expansion, either as a temporary restraint on inflation or as the underlying source of a new inflation regime. Two pieces of evidence are offered suggesting that...

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Bibliographic Details
Published in:Economic Policy Review - Federal Reserve Bank of New York 1997-12, Vol.3 (4), p.51-51 e 70
Main Authors: Lown, Cara S, Rich, Robert W
Format: Article
Language:English
Subjects:
Analysis
Compensation
Economic conditions
Economic impact
Economic models
Economic policy
Economics
Inflation
Inflation (Finance)
Inflation rates
Prices
Statistical data
Statistics
Studies
U.S.A
Wages
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Summary:A study investigates whether compensation growth has played a role in inflation's failure to accelerate despite 6 years of continuing expansion, either as a temporary restraint on inflation or as the underlying source of a new inflation regime. Two pieces of evidence are offered suggesting that compensation growth has in fact acted as a temporary curb on rising prices. First, it is shown that the forecasting performance of a traditional Philips curve model begins to break down in late 1993. When a measure of compensation growth is incorporated, however, the stability of the model is restored. Second, it is shown that the slowdown in compensation growth appears to be temporary and was unusually severe from late 1992 to early 1995, a period that roughly coincides with the breakdown in the traditional model.
ISSN:1932-0426
1932-0604