Working Paper: NBER ID: w21726
Authors: Olivier Blanchard; Eugenio Cerutti; Lawrence Summers
Abstract: We explore two issues triggered by the crisis. First, in most advanced countries, output remains far below the pre-recession trend, suggesting hysteresis. Second, while inflation has decreased, it has decreased less than anticipated, suggesting a breakdown of the relation between inflation and activity. To examine the first, we look at 122 recessions over the past 50 years in 23 countries. We find that a high proportion of them have been followed by lower output or even lower growth. To examine the second, we estimate a Phillips curve relation over the past 50 years for 20 countries. We find that the effect of unemployment on inflation, for given expected inflation, decreased until the early 1990s, but has remained roughly stable since then. We draw implications of our findings for monetary policy.
Keywords: Inflation; Monetary Policy; Hysteresis; Phillips Curve
JEL Codes: E31; E32; E50
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Recession (E32) | Lower output relative to prerecession trend (E23) |
| Recession (E32) | Lower output growth relative to prerecession trend (O49) |
| Unemployment gap (J64) | Inflation (E31) |
| Unemployment gap (decreasing effect) (J64) | Inflation (E31) |
| Lower growth expectations (O49) | Recession (E32) |
| Lower growth expectations (O49) | Lower performance (D29) |