Why Is Inflation Low When Productivity Growth Is High? |
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| Authors: | Michael T. Kiley |
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| Affiliation: | Economist, Organisation for Economic Cooperation and Development, 2 rue AndréPascal, 75016 Paris, France, and Federal Reserve Board, Mail Stop 67, Washington, DC 20551. Phone +33 1 4524 8732, Fax +33 1 4430 6384, E-mail |
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| Abstract: | Inflation has been low when productivity growth has been high. This occurs because the Federal Reserve has not adjusted nominal income growth in response to changes in productivity growth, implying that an acceleration in trend productivity growth leads to a deceleration in inflation. The model's predictions are confirmed: (1) Inflation should fall when trend productivity growth rises, and (2) nominal income and wage growth should not change with trend productivity. The model also implies that productivity growth enters a Phillips curve relationship as a proxy for inflation expectations. Thus, estimates of the NAIRU should fall when productivity growth accelerates. |
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