An Empirical Analysis of Inflation in Oecd Countries

Board of Governors of the Federal Reserve System
International Finance Discussion Papers

Number 765
May 2003
AN EMPIRICAL ANALYSIS OF INFLATION IN OECD COUNTRIES
Jane Ihrig and Jaime Marquez
NOTE: International Finance Discussion Papers are preliminary materials circulated to stimulate
discussion and critical comment. References in publications to International Finance Discussion Papers
(other than an acknowledgment that the writer has had access to unpublished material) should be cleared
with the author or authors. Recent IFDPs are available on the Web at www.federalreserve.gov/pubs/ifdp/.
AN EMPIRICAL ANALYSIS OF INFLATION IN OECD COUNTRIES
Jane Ihrig and Jaime Marquez*
Abstract: One of the most remarkable macroeconomic developments of the past decade has been the
widespread decline in inflation despite declines in unemployment rates. For the United States, these
seemingly contradictory developments have been reconciled in terms of three factors: (1) an acceleration
in productivity, (2) structural changes in labor markets that lowered the natural unemployment rate
(NAIRU), and (3) improved credibility of monetary policy. Here we ask whether comparable factors were
at work in foreign industrial countries. To address this question, we empirically characterize the relationship
between inflation, the unemployment rate, and structural factors using an extended Phillips curve model with
quarterly data through 1994. By undertaking counterfactual simulations from 1995 to 2001, we quantify the
separate contributions of unemployment-rate movements, labor-market reforms (that affected the NAIRU),
and productivity developments on inflation. In line with previous work on the United States, we find that
productivity advancements were the main structural factor reducing inflation in the United States. For
foreign countries, persistent labor-market slack was the main factor exerting downward pressure on inflation.
This persistence stemmed, in part, from structural reforms that lowered the NAIRU while the unemployment
rate was declining.
Keywords: Phillips Curve, Unemployment, NAIRU, Labor Productivity, Policy Credibility, Business
Cycles, Model Simulations.
Staff economists of the Division of International Finance of the Federal Reserve Board.We would like
to thank Steven Kamin for numerous comments on the evolution of this paper; Flint Brayton, Jon Faust,
David Lebow and Deb Lindner offered important suggestions that improved this version of the paper.
We have also benefited from Olivier Blanchard, Oyvind Eitrheim, Neil Ericsson, Joe Gagnon, Joe
Gruber, Bill Helkie, Karen Johnson, David Reifschenider, Nathan Sheets, Sandy Struckmeyer, and Bob
Tetlow. We are especially grateful to Carter Hemphill for all his work; Marcus Loveland, Patti Teagle
and Shing-Yi Wang also provided invaluable research assistance. The views in this paper are solely the
responsibility of the authors and should not be interpreted as reflecting the views of the Board of
Governors of the Federal Reserve System or of any other person associated with the Federal Reserve
System.
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Figure 1
Inflation and Unemployment Rates in Selected OECD Countries
Percent
Australia
CPI
Unemployment rate
Percent
24
Austria
20
CPI
Unemployment rate
16
20
16
12
12
8
8
4
4
0
-4
1970 1974 1978 1982 1986 1990 1994 1998 2002
-4
1970 1974 1978 1982 1986 1990 1994 1998 2002
Percent
Belgium
CPI
Unemployment rate
Percent
20
Canada
16
CPI
Unemployment rate
20
16
12
12
-4
1970 1974 1978 1982 1986 1990 1994 1998 2002
-4
1970 1974 1978 1982 1986 1990 1994 1998 2002
Percent
Finland
CPI
Unemployment rate
Percent
24
France
20
CPI
Unemployment rate
16
20
16
12
12
8
8
4
4
0
-4
1970 1974 1978 1982 1986 1990 1994 1998 2002
-4
1970 1974 1978 1982 1986 1990 1994 1998 2002
Inflation rates are quarterly (a.r.) growth rates of headline CPIs. Unemployment rates are quarterly averages.
Figure 1

(continued)
Percent
Germany
CPI
Unemployment rate
Percent
16
Greece
12
CPI
Unemployment rate
36
32
28
24
20
4
16
12
8
4
-4
0
-8
1970 1974 1978 1982 1986 1990 1994 1998 2002
Percent
Ireland
CPI
Unemployment rate
-4
1970 1974 1978 1982 1986 1990 1994 1998 2002
Percent
36
32
Italy
CPI
Unemployment rate
36
32
28
28
24
24
20
20
16
16
12
12
-4
1970 1974 1978 1982 1986 1990 1994 1998 2002
-4
1970 1974 1978 1982 1986 1990 1994 1998 2002
Percent
Japan
CPI
Unemployment rate
Percent
36
32
Netherlands
16
CPI
Unemployment rate
12
28
24
20
16
12
8
4
0
-4
1970 1974 1978 1982 1986 1990 1994 1998 2002
-4
1970 1974 1978 1982 1986 1990 1994 1998 2002
Figure 1

(continued)
Percent
New Zealand
CPI
Unemployment rate
Percent
40
36
Norway
CPI
Unemployment rate
32
28
24
20
16
24
20
12
16
12
4
8
4
0
-4
1970 1974 1978 1982 1986 1990 1994 1998 2002
Percent
Portugal
CPI
Unemployment rate
-4
1970 1974 1978 1982 1986 1990 1994 1998 2002
Percent
40
36
Spain
CPI
Unemployment rate
40
36
32
32
28
28
24
24
20
20
16
16
12
12
-4
1970 1974 1978 1982 1986 1990 1994 1998 2002
-4
1970 1974 1978 1982 1986 1990 1994 1998 2002
Percent
Sweden
CPI
Unemployment rate
Percent
24
Switzerland
20
CPI
Unemployment rate
24
20
16
16
12
12
-4
1970 1974 1978 1982 1986 1990 1994 1998 2002
-4
1970 1974 1978 1982 1986 1990 1994 1998 2002
Figure 1

(continued)
Percent
United Kingdom
CPI*
Unemployment rate
Percent
24
United States
20
CPI
Unemployment rate
24
20
16
16
12
12
0
1970 1974 1978 1982 1986 1990 1994 1998 2002
0
1970 1974 1978 1982 1986 1990 1994 1998 2002
* RPIX
Figure 2
Labor Market Developments

United States
Foreign Industrial Countries

Percent
Percent
12
11
12
11
10
10
Unemployment rate
Unemployment rate
1992
1994
1996
1998
7
NAIRU
NAIRU
1990
2000
Source: NAIRU: OECD; unemployment rate: BLS.
1990
1992
1994
1998
2000
United Kingdom
Percent
Unemployment rate
Percent
12
NAIRU
11
10
10
Unemployment rate
1996
1998
Source: NAIRU: OECD; unemployment rate: Eurostat.
2000
1994
12
11
1992
1996
Source: Staff calculations using OECD data, GDP-weighted average

across 19 foreign OECD countries.
Euro Area
1990
NAIRU
1990
1992
Source: OECD.
1994
1996
1998
2000
-3
-1.5
-2
-1
-1.0
y = -0.43x + 0.10
( 0.19) (0.28)
R2 = 0.23
-0.5
Japan
New Zealand
0.0
1.0
1.5
Italy
2.0
Portugal
Average EGAP (1995-2001), percent
0.5
Sweden
Austria
France
Switzerland
Australia
Canada Belgium
* Greece (-.20, -7.22)
United States
Netherlands
Norway
United Kingdom
Ireland
2.5
Finland
Figure 3
Average Unemployment Gap (EGAP) vs. Change in Inflation
EGAP = U-U*, >0 means slack in the labor market.

(The observation for Greece is excluded from the regression because it is an outlier.)
Change in Inflation (1999-2001) - (1993-1995),

percentage points
3.0
3.5
Spain
Germany
4.0
-8
-3.0
-6
-4
-2
-2.5
y = 0.87x - 0.10
(0.36) (0.43)
2
R = 0.24
Spain
Belgium
-2.0
-1.5
Greece
-1.0
Canada
-0.5
Italy
Portugal
U.K.
Japan
Australia
0.0
Austria
0.5
1.0
U.S.
New Zealand
Netherlands
Average OECD OGAP (1995-2001), percent
France
Switzerland
Germany
Sweden
Finland
Figure 4
Average OECD Output Gap (OGAP) vs. Change in Inflation
OGAP = (GDP-Potential)/Potential, >0 means production is above capacity.
Change in Inflation (1999-2001) - (1993-1995),

percentage points
Norway
Ireland
1.5
2.0
-6.0
-4.0
-2.0
Australia
Netherlands
New Zealand
Norway
Sweden
percentage points
0.0
Austria
Belgium
Canada
Finland
France
Germany
Greece
Ireland
Italy
Japan
Portugal
Spain
Switzerland
United Kingdom
United States
2.0
Figure 5: Equation 1, Mean 1-Step Ahead Forecast Error

1995Q1 - 2001Q4 (- means overprediction)
4.0
6.0
1994
1995
1996
1997
1998
1999
S : NAIRU and Productivity Growth at 1994 values
U* : NAIRU at 1994 value
(Annualized Quarterly Growthy Rates, Percent)
2000
2001
B: Baseline
U=U* : No slack
Figure 6: U.S. Inflation Rate: Counterfactual Simulations
2002
1994
1995
1996
1997
U* : NAIRU at 1994 value
1998
1999
Figure 7: Irish Inflation Rate: Counterfactual Simulations

2000
2001
U=U* : No slack
B: Baseline
1.0
1.5
2.0
2.5
3.0
3.5
4.0
1994
1995
1996
1997
1998
U*
: NAIRU at 1994 value
1999
Figure 8: Netherlands Inflation Rate: Counterfactual Simulations

2000
U=U* : No slack
2001
B : Baseline
-2.0
-1.0
Constant NAIRU and Productivity Growth
-3.0
-3.05
Belgium
Canada
Finland
France
Ireland
Italy
Australia
Constant NAIRU
Percentage Points
0.0
Austria
Germany
Greece
Japan
Netherlands
New Zealand
Norway
Portugal
Spain
Sweden
Switzerland
United Kingdom
United States
1.0
( - means pushed down inflation)
2.0
Figure 9: Equation 1, ExPost - Counterfactual Simulation
3.0
Figure A1
Unit Labor Costs in Selected OECD Countries
Percent
Australia
Percent
28
24
Austria
28
24
20
20
16
16
12
12
-4
-4
-8
1970 1974 1978 1982 1986 1990 1994 1998 2002
-8
1970 1974 1978 1982 1986 1990 1994 1998 2002
Percent
Belgium
Percent
28
24
Canada
28
24
20
20
16
16
12
12
-4
-4
-8
1970 1974 1978 1982 1986 1990 1994 1998 2002
-8
1970 1974 1978 1982 1986 1990 1994 1998 2002
Percent
Finland
Percent
28
24
France
28
24
20
20
16
16
12
12
-4
-4
-8
1970 1974 1978 1982 1986 1990 1994 1998 2002
-8
1970 1974 1978 1982 1986 1990 1994 1998 2002
Unit labor costs are quarterly (a.r.) growth rates.
Figure A1

(continued)
Percent
Germany
Percent
28
24
Greece
40
36
32
20
28
16
24
20
12
16
8
12
8
4
0
-4
-8
1970 1974 1978 1982 1986 1990 1994 1998 2002
Percent
Ireland
-4
-8
1970 1974 1978 1982 1986 1990 1994 1998 2002
Percent
28
24
Italy
28
24
20
20
16
16
12
12
-4
-4
-8
1970 1974 1978 1982 1986 1990 1994 1998 2002
-8
1970 1974 1978 1982 1986 1990 1994 1998 2002
Percent
Japan
Percent
28
24
Netherlands
28
24
20
20
16
16
12
12
-4
-4
-8
1970 1974 1978 1982 1986 1990 1994 1998 2002
-8
1970 1974 1978 1982 1986 1990 1994 1998 2002
Figure A1

(continued)
Percent
New Zealand
Percent
28
24
Norway
28
24
20
20
16
16
12
12
-4
-4
-8
1970 1974 1978 1982 1986 1990 1994 1998 2002
-8
1970 1974 1978 1982 1986 1990 1994 1998 2002
Percent
Portugal
Percent
28
24
Spain
28
24
20
20
16
16
12
12
-4
-4
-8
1970 1974 1978 1982 1986 1990 1994 1998 2002
-8
1970 1974 1978 1982 1986 1990 1994 1998 2002
Percent
Sweden
Percent
28
24
Switzerland
28
24
20
20
16
16
12
12
-4
-4
-8
1970 1974 1978 1982 1986 1990 1994 1998 2002
-8
1970 1974 1978 1982 1986 1990 1994 1998 2002
Figure A1

(continued)
Percent
United Kingdom
Percent
28
24
United States
28
24
20
20
16
16
12
12
-4
-4
-8
1970 1974 1978 1982 1986 1990 1994 1998 2002
-8
1970 1974 1978 1982 1986 1990 1994 1998 2002
Figure A2 - Post-Pre Unemployment Coefficient, equation 3

2nd-1st sample
United States
United Kingdom
Switzerland
Sweden
Spain
Portugal
Norway
New Zealand
Netherlands
Japan
Italy
Ireland
Greece
Germany
France
Canada
Belgium
Austria
Australia
-6
-4
-2
Change in Estimated Elasticity of Inflation to Unemployment Gap
Table 1
Headline Inflation in Industrial Countries: Selected Periods
Average of quarterly inflation (a.r.), percent
Country
1990-1994
1995 - 2001
Change
Australia
2.64
2.66
0.02
Austria
3.41
1.64
-1.77
Belgium
2.70
1.79
-0.92
Canada
2.52
1.80
-0.72
Finland
2.85
1.58
-1.27
France
2.42
1.34
-1.08
Germany
3.27
1.49
-1.78
Greece
15.61
4.83
-10.78
Ireland
2.47
2.99
0.52
Italy
5.09
2.76
-2.33
Japan
1.77
0.09
-1.68
Netherlands
2.91
2.49
-0.41
New Zealand
2.27
1.86
-0.42
Norway
2.60
2.33
-0.27
Portugal
8.40
3.09
-5.32
Spain
5.32
2.96
-2.36
Sweden
5.41
1.02
-4.39
Switzerland
3.56
0.90
-2.66
United Kingdom
4.71
2.49
-2.22
United States
3.53
2.45
-1.08
2.91
1.86
-1.05
memos:
Foreign Median
Source: Headline CPI measures, except United Kingdom which is RPIX, from national
statistic offices.
Table 2
Unemployment Rates in Industrial Countries: Selected Periods
Averages at annual rates, percent
1990-1994
1995 - 2001
Change
(90-94) to (95-01)
1999-2001
Change
(90-94) to (99-01)
Australia
9.30
7.49
-1.81
6.66
-2.65
Austria
6.11
6.65
0.54
6.19
0.09
Belgium
7.70
8.55
0.85
7.35
-0.34
Canada
10.27
8.29
-1.98
7.20
-3.08
Finland
10.95
11.84
0.89
9.71
-1.24
France
10.44
11.04
0.60
9.84
-0.60
Germany
7.66
10.27
2.61
9.83
2.17
Greece
7.39
9.37
1.97
11.07
3.67
Ireland
14.50
7.73
-6.77
4.44
-10.06
Italy
9.11
11.20
2.09
10.51
1.40
Japan
2.35
4.07
1.72
4.82
2.47
Netherlands
6.11
4.48
-1.63
2.61
-3.50
New Zealand
9.20
6.38
-2.82
6.04
-3.16
Norway
5.70
3.92
-1.78
3.43
-2.27
Portugal
5.19
5.62
0.44
4.26
-0.93
Spain
19.57
18.26
-1.31
14.33
-5.24
Sweden
5.21
6.36
1.14
4.74
-0.47
Switzerland
2.68
3.50
0.82
2.18
-0.49
United Kingdom
8.82
6.50
-2.32
5.56
-3.27
United States
6.60
4.78
-1.81
4.34
-2.25
Foreign Median
7.70
7.49
-0.21
6.19
-1.50
Country
Source: Unemployment rates are from national statistic offices.
1.70
4.05
1.98
2.21
4.60
2.37
2.98
2.37
3.45
3.15
2.45
2.35
1.29
Australia
Canada
Finland
France
Germany *
Ireland**
Italy
Japan
Netherlands
Norway
Spain
Sweden
United Kingdom
United States
1.67
2.16
1.40
2.02
0.79
1.64
1.56
1.67
1.62
4.00
2.03
2.31
3.74
1.13
2.39
Period (2)
1995-2000
Source: Gust and Marquez (2000).
n.a. not available
** Data for 1981-95 and 1996-99
-0.70
0.87
-0.95
-0.43
-2.36
-1.82
-0.81
-1.31
-0.76
-0.60
-0.18
0.33
-0.31
-0.57
0.28
Difference
(2) - (1)
* Germany only includes 1992-1994, to exclude the effects of unification.
Foreign Median
2.37
2.11
Country
Memo:
Period (1)
1990-1994
Labor Productivity Growth
Annual average growth rates
1.14
1.03
1.37
1.14
0.83
2.86
1.66
1.34
1.01
4.30
0.90
0.41
2.25
0.41
1.10
Period (1)
1990-1994
1.20
1.69
1.05
1.76
0.44
1.20
1.28
0.65
0.72
4.50
1.18
1.52
4.26
0.53
1.57
Period (2)
1995-2000
0.05
0.66
-0.33
0.62
-0.39
-1.66
-0.38
-0.69
-0.29
0.20
0.28
1.11
2.01
0.12
0.48
Difference
(2) - (1)
Total Factor Productivity Growth
Measures of Productivity: Selected Countries
Table 3
Table 4
Credibility of Monetary Policy: Selected Periods
Taylor Rule Inflation Coefficient*
Country
1st period
2nd period
Date of Sample Break
Australia
0.74
-3.28
1993
Austria
0.47
2.03
1984
Belgium
-1.10
2.40
1986
Canada
0.50
1.43
1984
Finland
-0.66
2.90
1984
France
0.69
2.92
1986
Germany
3.52
1.82
1980
Greece
0.34
0.29
1993
Ireland
0.36
2.51
1984
Italy
1.05
2.50
1986
Japan
2.78
2.46
1980
Netherlands
0.22
-4.77
1984
New Zealand
-0.37
5.66
1990
Norway
-0.86
7.14
1989
Portugal
1.01
1.77
1986
Spain
0.28
3.00
1986
Sweden
-0.52
-1.28
1992
Switzerland
0.36
1.09
1984
United Kingdom
0.56
1.51
1980
United States
0.70
1.22
1980
Foreign Median
0.36
2.03
* Taylor Rule inflation coefficients are from Gagnon and Ihrig (2001).
Dependent Variable is
Headline Inflation Rate (s.a.)
Table 5: OLS Coefficient Estimates and Residual Properties

Sensitivity to Measures of Slack
(standard errors in parentheses)
Australia
Austria
Potential Output
Natural Rate of
Unemployment
Potential Output
Natural Rate of
Unemployment
Moving
Average
HP
Filter
HP
Filter
OECD
Moving
Average
HP
Filter
HP
Filter
OECD
0.63
(0.21)
0.58
(0.26)
--
--
0.33
(0.10)
0.32
(0.15)
--
--
U U*
--
--
+0.06
(0.33)
-0.14
(0.24)
--
--
-0.98
(0.50)
-0.68
(0.34)
[log (CPI) log(Mprice)]
--
--
--
--
--
--
--
--
-0.02
(0.05)
-0.02
(0.05)
+0.01
(0.05)
-0.01
(0.05)
-0.20
(0.08)
-0.03
(0.07)
+0.03
(0.05)
-0.002
(0.05)
R2
SER (% a.r.)
0.47
3.40
0.39
3.56
0.44
3.39
0.46
3.34
0.52
1.43
0.30
1.73
0.36
1.67
0.38
1.65
Residual Properties (p-values) a

Serial Independence
Homoskedasticity
Normality
0.86
0.03
0.00
0.80
0.00
0.00
0.68
0.00
0.09
0.63
0.01
0.13
0.26
0.73
0.15
0.65
0.99
0.00
0.45
0.99
0.00
0.51
0.99
0.01
Sample
74-94
72-94
72-94
72-94
74-94
72-94
72-94
72-94
Sum of Coefficients for

(Y Y*)/Y*
[log(CPI) log(ULC)]
Entries correspond to the significance level to reject the associated hypothesis; an entry of 0.05 means that
one can reject the hypothesis with a 5 percent significance level. Serial Independence: F-test for the
hypothesis that all of the coefficients of an AR(5) for the residuals are equal to zero. Homoskedasticity:
ARCH t-test. Normality: Jarque-Bera chi-squared test.
Y: Real GDP
Y*: Potential GDP
U: Unemployment rate
U*: Natural Rate of Unemployment
CPI: Level of headline CPI
ULC: Level of unit-labor cost
Mprice: Level of import prices
Moving averages use contemporaneous and lags of 12 quarters GDP.

Belgium
Canada
Potential Output
Natural Rate of
Unemployment
Potential Output
Natural Rate of
Unemployment
Moving
Average
HP
Filter
HP
Filter
OECD
Moving
Average
HP
Filter
HP
Filter
OECD
0.26
(0.17)
0.04
(0.19)
--
--
0.34
(0.15)
0.47
(0.13)
--
--
U U*
--
--
-0.27
(0.21)
-0.30
(0.13)
--
--
-0.29
(0.19)
-0.14
(0.12)
--
+0.03
(0.02)
--
--
+0.04
(0.03)
-0.02
(0.02)
--
-0.01
(0.01)
-0.12
(0.08)
--
-0.05
(0.05)
-0.15
(0.08)
-0.10
(0.13)
+0.08
(0.09)
--
--
R2
SER (% a.r.)
0.39
1.40
0.44
1.36
0.30
1.48
0.34
1.44
0.76
1.24
0.64
1.48
0.67
1.43
0.71
1.13

Serial Independence
Homoskedasticity
Normality
0.63
0.56
0.31
0.95
0.99
0.46
0.28
0.68
0.35
0.09
0.25
0.47
0.48
0.59
0.51
0.90
0.33
0.80
0.56
0.73
0.35
0.17
0.45
0.99
Sample
81-94
81-94
81-94
81-94
81-94
81-94
81-94
77-94

(Y Y*)/Y*
[log(CPI) log(ULC)]
Y: Real GDP
Y*: Potential GDP

Finland
France
Potential Output
Natural Rate of
Unemployment
Potential Output
Natural Rate of
Unemployment
Moving
Average
HP
Filter
HP
Filter
OECD
Moving
Average
HP
Filter
HP
Filter
OECD
-0.04
(0.06)
-0.08
(0.10)
--
--
0.21
(0.14)
0.10
(0.23)
--
--
--
--
-0.02
(0.23)
-0.04
(0.21)
--
--
-0.45
(0.30)
-0.59
(0.17)
-0.09
(0.01)
-0.07
(0.01)
--
-0.004
(0.03)
--
--
--
--
[log(CPI) log(ULC)]
-0.19
(0.08)
-0.01
(0.06)
-0.08
(0.03)
-0.08
(0.16)
-0.05
(0.05)
-0.03
(0.06)
-0.03
(0.06)
-0.10
(0.06)
R2
SER (% a.r.)
0.95
1.37
0.94
1.39
0.51
4.13
0.51
4.13
0.59
1.31
0.37
1.50
0.27
1.59
0.38
1.46

Serial Independence
Homoskedasticity
Normality
0.88
0.78
0.19
0.66
0.85
0.26
0.67
0.18
0.00
0.07
0.18
0.00
0.98
0.93
0.81
0.60
0.65
0.00
0.09
0.66
0.00
0.29
0.82
0.00
Sample
80-94
80-94
80-94
80-94
79-94
79-94
79-94
79-94

(Y Y*)/Y*
U U*
Y: Real GDP
Y*: Potential GDP

Germany
Greece
Potential Output
Natural Rate of
Unemployment
Potential Output
Natural Rate of
Unemployment
Moving
Average
HP
Filter
HP
Filter
OECD
Moving
Average
HP
Filter
HP
Filter
OECD
0.04
(0.06)
-0.04
(0.10)
--
--
0.31
(0.26)
0.30
(0.32)
--
--
U U*
--
--
-0.89
(0.21)
-0.45
(0.11)
--
--
-3.80
(1.06)
-3.61
(0.91)
--
--
+0.02
(0.02)
-0.01
(0.02)
-0.23
(0.15)
-0.26
(0.14)
-0.58
(0.17)
-0.59
(0.16)
-0.23
(0.08)
-0.21
(0.08)
+0.09
(0.07)
-0.01
(0.08)
-0.50
(0.12)
-0.50
(0.12)
-0.27
(0.18)
-0.22
(0.17)
R2
SER (% a.r.)
0.78
1.35
0.75
1.42
0.73
1.42
0.73
1.44
0.64
3.01
0.64
3.03
0.55
3.27
0.57
3.18

Serial Independence
Homoskedasticity
Normality
0.49
0.34
0.19
0.50
0.60
0.26
0.01
0.35
0.50
0.02
0.27
0.49
0.39
0.79
0.04
0.42
0.77
0.05
0.26
0.96
0.00
0.27
0.93
0.01
Sample
74-94
74-94
72-94
72-94
82-94
82-94
82-94
82-94

(Y Y*)/Y*
[log(CPI) log(ULC)]
Y: Real GDP
Y*: Potential GDP

Ireland
Italy
Potential Output
Natural Rate of
Unemployment
Potential Output
Natural Rate of
Unemployment
Moving
Average
HP
Filter
HP
Filter
OECD
Moving
Average
HP
Filter
HP
Filter
OECD
0.76
(0.26)
-0.12
(0.17)
--
--
0.08
(0.22)
0.19
(0.36)
--
--
U U*
--
--
-0.19
(0.55)
-0.32
(0.44)
--
--
0.25
(0.58)
-0.39
(0.40)
--
-0.02
(0.01)
-0.03
(0.02)
-0.02
(0.02)
+0.03
(0.01)
+0.02
(0.01)
+0.03
(0.01)
+0.03
(0.01)
-0.21
(0.09)
--
-0.01
(0.06)
-0.04
(0.06)
-0.24
(0.13)
--
--
--
R2
SER (% a.r.)
0.72
2.76
0.68
2.81
0.78
2.44
0.79
2.38
0.67
2.32
0.42
2.94
0.49
2.75
0.52
2.68

Serial Independence
Homoskedasticity
Normality
0.53
0.06
0.00
0.45
0.01
0.00
0.45
0.19
0.01
0.36
0.25
0.01
0.89
0.38
0.48
0.55
0.00
0.60
0.86
0.21
0.28
0.80
0.20
0.23
Sample
81-94
81-94
81-94
81-94
74-94
74-94
72-94
72-94

(Y Y*)/Y*
[log(CPI) log(ULC)]
Y: Real GDP
Y*: Potential GDP

Japan
Netherlands
Potential Output
Natural Rate of
Unemployment
Potential Output
Natural Rate of
Unemployment
Moving
Average
HP
Filter
HP
Filter
OECD
Moving
Average
HP
Filter
HP
Filter
OECD
0.13
(0.09)
0.29
(0.17)
--
--
0.09
(0.09)
0.18
(0.15)
--
--
--
--
-1.07
(1.59)
-2.77
(0.83)
--
--
-0.47
(0.20)
-0.44
(0.15)
+0.01
(0.01)
--
--
-0.01
(0.01)
--
--
--
--
[log(CPI) log(ULC)]
+0.04
(0.09)
+0.14
(0.07)
--
--
--
--
+0.01
(0.01
-0.01
(0.02)
R2
SER (% a.r.)
0.69
1.34
0.64
1.44
0.50
2.60
0.61
2.30
0.39
1.57
0.40
1.55
0.39
1.52
0.40
1.51

Serial Independence
Homoskedasticity
Normality
0.04
0.88
0.02
0.32
0.00
0.00
0.09
0.00
0.00
0.11
0.02
0.00
0.94
0.99
0.49
0.98
0.72
0.50
0.70
0.95
0.40
0.68
0.98
0.43
Sample
75-94
75-94
72-94
72-94
75-94
75-94
73-94
73-94

(Y Y*)/Y*
U U*
Y: Real GDP
Y*: Potential GDP

New
Norway
Zealand
Potential Output
Natural Rate of
Unemployment
Potential Output
Natural Rate of
Unemployment
Moving
Average
HP
Filter
HP
Filter
OECD
Moving
Average
HP
Filter
HP
Filter
OECD
0.59
(0.34)
1.15
(0.44)
--
--
0.41
(0.13)
0.93
(0.21)
--
--
--
--
-2.34
(1.08)
-1.86
(0.87)
--
--
-1.44
(0.45)
-1.58
(0.43)
-0.03
(0.08)
-0.30
(0.09)
-0.38
(0.16)
-0.27
(0.17)
-0.06
(0.03)
-0.06
(0.02)
-0.06
(0.02)
-0.06
(0.02)
--
+0.67
(0.20)
--
--
+0.12
(0.06)
--
--
--
R2
SER (% a.r.)
0.82
3.59
0.87
3.00
0.78
4.01
0.78
4.02
0.66
1.87
0.70
1.83
0.54
2.19
0.56
2.14

Serial Independence
Homoskedasticity
Normality
0.65
0.97
0.06
0.31
0.99
0.00
0.96
0.88
0.22
0.92
0.88
0.17
0.29
0.95
0.02
0.73
0.97
0.00
0.92
0.97
0.00
0.94
0.97
0.00
Sample
86-94
86-94
86-94
86-94
74-94
73-94
73-94
73-94

(Y Y*)/Y*
U U*
[log(CPI) log(ULC)]
Y: Real GDP
Y*: Potential GDP

Portugal
Potential Output
Natural Rate of
Unemployment
Spain
Potential Output
Natural Rate of
Unemployment
Moving
Average
HP
Filter
HP
Filter
OECD
Moving
Average
HP
Filter
HP
Filter
OECD
0.56
(0.17)
0.91
(0.31)
--
--
0.33
(0.12)
0.45
(0.21)
--
--
U U*
--
--
-1.02
(0.67)
-1.07
(0.46)
--
--
-0.15
(0.13)
-0.12
(0.09)
--
--
--
--
--
--
--
--
-0.11
(0.12)
-0.17
(0.13)
+0.04
(0.12)
-0.05
(0.13)
-0.17
(0.06)
-0.06
(0.05)
-0.02
(0.05)
-0.02
(0.04)
R2
SER (% a.r.)
0.62
3.50
0.56
3.62
0.51
3.81
0.55
3.68
0.58
1.89
0.55
1.94
0.46
2.05
0.47
2.05

Serial Independence
Homoskedasticity
Normality
0.45
0.59
0.25
0.32
0.39
0.46
0.16
0.58
0.17
0.16
0.56
0.33
0.30
0.94
0.15
0.19
0.98
0.15
0.06
0.92
0.17
0.05
0.92
0.15
Sample
84-94
84-94
84-94
84-94
79-94
79-94
74-94
79-94

(Y Y*)/Y*
[log(CPI) log(ULC)]
Y: Real GDP
Y*: Potential GDP

Sweden
Switzerland
Potential Output
Natural Rate of
Unemployment
Potential Output
Natural Rate of
Unemployment
Moving
Average
HP
Filter
HP
Filter
OECD
Moving
Average
HP
Filter
HP
Filter
OECD
0.47
(0.21)
0.50
(0.27)
--
--
0.32
(0.13)
0.61
(0.23)
--
--
--
--
-0.17
(0.40)
-0.25
(0.29)
--
--
-0.31
(0.42)
-0.28
(0.26)
+0.04
(0.03)
--
--
--
--
--
--
--
[log(CPI) log(ULC)]
-0.16
(0.07)
-0.02
(0.07)
-0.01
(0.08)
-0.02
(0.07)
-0.04
(0.08)
-0.18
(0.11)
+0.02
(0.08)
-0.05
(0.08)
R2
SER (% a.r.)
0.64
3.20
0.46
3.65
0.51
3.45
0.53
3.41
0.24
1.93
0.30
1.92
0.20
1.99
0.26
1.92

Serial Independence
Homoskedasticity
Normality
0.30
0.41
0.05
0.67
0.64
0.02
0.84
0.51
0.01
0.85
0.37
0.01
0.61
0.22
0.37
0.43
0.02
0.37
0.55
0.47
0.14
0.53
0.51
0.25
Sample
74-94
72-94
72-94
72-94
79-94
79-94
79-94
79-94

(Y Y*)/Y*
U U*
Y: Real GDP
Y*: Potential GDP

United
United
Kingdom
States
Potential Output
Natural Rate of
Unemployment
Potential Output
Natural Rate of
Unemployment
Moving
Average
HP
Filter
HP
Filter
OECD
Moving
Average
HP
Filter
HP
Filter
OECD
0.70
(0.13)
0.48
(0.20)
--
--
0.20
(0.10)
0.53
(0.14)
--
--
--
--
-0.07
(0.15)
-0.15
(0.12)
--
--
-0.52
(0.21)
-0.38
(0.19)
+0.05
(0.02)
--
--
--
+0.07
(0.03)
+0.07
(0.02)
+0.09
(0.03)
+0.07
(0.03)
[log(CPI) log(ULC)]
-0.38
(0.12)
--
--
--
-0.20
(0.08)
-0.21
(0.07)
-0.21
(0.08)
-0.19
(0.08)
R2
SER (% a.r.)
0.85
1.71
0.81
1.97
0.81
1.92
0.81
1.92
0.47
1.65
0.54
1.56
0.65
1.38
0.64
1.40

Serial Independence
Homoskedasticity
Normality
0.20
0.34
0.06
0.10
0.27
0.07
0.03
0.88
0.02
0.02
0.61
0.08
0.99
0.50
0.27
0.32
0.34
0.12
0.23
0.99
0.52
0.14
0.98
0.74
Sample
77-94
77-94
77-94
77-94
77-94
77-94
77-94
77-94

(Y Y*)/Y*
U U*
Y: Real GDP
Y*: Potential GDP
Table 6: One-step Ahead Prediction Errors of CPI Inflation (Actual Predicted):

Sensitivity to Model Specification
Equation 1: Phillips Curve with

Productivity and Time-varying
NAIRU
Equation 2: Standard Phillips

Curve
Country
Mean Forecast
Error
Test of Zero
Mean
Mean Forecast
Error
Test of Zero
Mean
Australia
-0.22
-0.34
-0.47
-0.73
Austria
0.47
1.51
0.01
0.04
Belgium
0.68
2.52*
0.14
0.53
Canada
0.22
1.04
-0.08
-0.35
Finland
1.40
1.82
0.20
0.52
France
0.72
2.61*
0.19
0.64
Germany
0.74
2.74*
0.42
1.47
Greece
3.60
5.99*
3.78
5.67*
Ireland
0.60
1.33
5.67
6.98*
Italy
0.18
0.35
-0.05
-0.09
Japan
2.20
5.06*
1.53
2.88*
Netherlands
0.06
0.21
-0.14
-0.47
New Zealand
-1.12
-1.47
-4.45
-5.64*
Norway
0.26
0.65
-0.33
-0.68
Portugal
0.96
1.38
0.70
1.02
Spain
0.32
0.83
0.56
1.20
Sweden
-0.12
-0.19
-1.14
-1.79
Switzerland
-0.11
-0.30
-0.14
-0.34
United Kingdom
0.01
0.02
0.49
1.35
United States
-0.33
-1.25
-0.67
-2.43*
* Mean forecast error is significantly different from zero at the 95 percent confidence level
Table 7: Effects of Labor-market Slack on Inflation

Average Percentage Points, 1995-2001
Country
Australia
Austria
Belgium
Canada
Finland
France
Germany
Greece
Ireland
Italy
Japan
Netherlands
New Zealand
Norway
Portugal
Spain
Sweden
Switzerland
United Kingdom
United States
Total a
NAIRU b
Cyclical c
-0.17
-1.17
-0.15
-0.16
-0.09
-0.65
-1.30
1.81
0.47
-0.48
-2.27
0.11
-0.78
0.10
-1.44
-0.35
-0.26
-0.33
-0.03
0.23
-0.23
0.02
-0.05
-0.41
-0.03
-0.31
0.24
0.78
-1.79
-0.15
2.69
-0.42
-3.05
-1.57
-0.15
-0.25
0.04
0.01
-0.15
-0.02
0.06
-1.19
-0.10
0.24
-0.06
-0.34
-1.54
1.03
2.26
-0.33
-4.96
0.53
2.27
1.67
-1.29
-0.10
-0.30
-0.34
0.12
0.24
Total effect is estimated as the average of the difference between baseline inflation and the
counterfactual inflation assuming that labor-market slack is absent from 1995 to 2001.
b
NAIRU effect is estimated as the average of the difference between baseline inflation and the
counterfactual inflation assuming that the NAIRU remains at its 1994 value from 1995 to 2001.
Cyclical effect is estimated as the difference Total effect and the NAIRU effect.
Table A1: Recursive Chow Test Results: Frequency and Dates of Instability
Alternative Samples
Estimation Sample ends in 1994:4
Full Sample
1 quarter ahead Contracting b
United States
Full-Sample
Dates
Expanding c
1 quarter ahead
Contracting b
Expanding c
1972-2002.1
Australia
Austria
0
+1984
0
0
0
0
0
0
0
0
1972-2002.1
1972-2002.1
Belgium
Canada
Finland
France
0
0
0
+1991
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
1981-2001.4
1977-2001.4
1980-2002.2
1979-2001.3
+1983,1992
0
0
0
+ 1978
+1983
0
0
0
0
0
0
+1990
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
+
1984
+2001
0
0
+
1991
+1983,1992
0
0
0
++1987,97-98
+1983
0
+1996
0
0
0
0
+1994
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
1972-2001.1
1982-1999.2
1981-2000.4
1972-2001.4
1972-2002.1
1973-2000.4
1986-2001.1
1973-2001.4
1984-2002.1
1979-2002.1
1972-2000.2
1979-2002.2
1977-2002.1
Germany
Greece
Ireland
Italy
Japan
Netherlands
New Zealand
Norway
Portugal
Spain
Sweden
Switzerland
United Kingdom
An entry of 0 denotes no rejections of the hypothesis of parameter stability for the period considered.
An entry of + denotes one or two rejections of the hypothesis of parameter stability for the period
considered; ++ denotes half-dozen rejections of the hypothesis of parameter stability; +++ denotes
numerous rejections of the hypothesis of parameter stability.
b
c
Forecast horizon contracts, one quarter at a time, as the estimation sample increases.
Forecast horizon expands, one quarter at a time, as the estimation sample increases.
Table A2: OLS Coefficient Estimates and Residual Properties for Standard Phillips Curve
Australia
Austria
Belgium Canada
Finland
France
U
Germany
-0.11
(0.15)
-0.01
(0.10)
-0.16
(0.16)
-0.06
(0.10)
0.13
(0.08)
-0.02
(0.11)
-0.10
(0.06)
--
--
--
--
-0.04
(0.01)
--
--
R2
SER (% a.r.)
0.43
3.41
0.31
1.72
0.34
1.44
0.72
1.12
0.87
1.99
0.27
1.54
0.69
1.50

Serial Independence
Homoskedasticity
Normality
0.45
0.00
0.10
0.55
0.98
0.00
0.39
0.54
0.92
0.12
0.46
0.96
0.19
0.99
0.05
0.17
0.53
0.00
0.06
0.60
0.23
Entries correspond to the significance level to reject the associated hypothesis; an entry of 0.05 means that one
can reject the hypothesis with a 5 percent significance level. Serial Independence: F-test for the hypothesis that all
of the coefficients of an AR(5) for the residuals are equal to zero. Homoskedasticity: ARCH t-test. Normality:
Jarque-Bera chi-squared test.
P: Level of headline CPI
Table A2: OLS Coefficient Estimates and Residual Properties for Standard Phillips Curve (continued)
Italy
Japan
New
Greece
Ireland
Netherlands
Norway
Zealand
U
-0.96
(0.50)
0.76
(0.35)
-0.16
(0.18)
-0.40
(0.70)
-0.03
(0.09)
-2.24
(1.00)
-0.07
(0.17)
-0.44
(0.14)
-0.07
(0.03)
--
--
--
-0.28
(0.18)
--
[log(CPI) log(Mprice)]
R2
SER (% a.r.)
0.44
3.53
0.51
4.29
0.32
3.14
0.40
2.82
0.33
1.57
0.75
4.18
0.32
2.55

Serial Independence
Homoskedasticity
Normality
0.94
0.72
0.12
0.54
0.00
0.08
0.95
0.48
0.01
0.19
0.00
0.00
0.81
0.95
0.61
0.86
0.22
0.05
0.73
0.52
0.00
Entries correspond to the significance level to reject the associated hypothesis; an entry of 0.05 means that one
can reject the hypothesis with a 5 percent significance level. Serial Independence: F-test for the hypothesis that
all of the coefficients of an AR(5) for the residuals are equal to zero. Homoskedasticity: ARCH t-test.
Normality: Jarque-Bera chi-squared test.
Table A2: OLS Coefficient Estimates and Residual Properties for Standard Phillips Curve (continued)
Switzerland
Portugal
Spain
Sweden
UK
US
U
-0.86
(0.31)
[log(CPI) log(Mprice)]
-0.02
(0.07)
-1.27
(0.50)
-0.02
(0.23)
0.20
(0.10)
-0.411
(0.19)
--
--
--
--
0.001
(0.004)
--
R2
SER (% a.r.)
0.55
3.61
0.47
2.05
0.54
3.38
0.26
2.20
0.81
1.93
0.61
1.46

Serial Independence
Homoskedasticity
Normality
0.19
0.38
0.54
0.33
0.99
0.25
0.58
0.43
0.00
0.93
0.57
0.00
0.67
0.95
0.00
0.53
0.84
0.64
Entries correspond to the significance level to reject the associated

hypothesis; an entry of 0.05 means that one can reject the hypothesis
with a 5 percent significance level. Serial Independence: F-test for the
hypothesis that all of the coefficients of an AR(5) for the residuals are
equal to zero. Homoskedasticity: ARCH t-test. Normality: Jarque-Bera
chi-squared test.

An Empirical Analysis of Inflation in Oecd Countries

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Board of Governors of the Federal Reserve System

International Finance Discussion Papers

AN EMPIRICAL ANALYSIS OF INFLATION IN OECD COUNTRIES

Jane Ihrig and Jaime Marquez

AN EMPIRICAL ANALYSIS OF INFLATION IN OECD COUNTRIES

Jane Ihrig and Jaime Marquez*

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Inflation and Unemployment Rates in Selected OECD Countries

Inflation and Unemployment Rates in Selected OECD Countries

Inflation and Unemployment Rates in Selected OECD Countries

Inflation and Unemployment Rates in Selected OECD Countries

Labor Market Developments

Foreign Industrial Countries

Source: NAIRU: OECD; unemployment rate: BLS.

Source: NAIRU: OECD; unemployment rate: Eurostat.

Source: Staff calculations using OECD data, GDP-weighted average

Average EGAP (1995-2001), percent

* Greece (-.20, -7.22)

EGAP = U-U*, >0 means slack in the labor market.

Change in Inflation (1999-2001) - (1993-1995),

Average OECD OGAP (1995-2001), percent

OGAP = (GDP-Potential)/Potential, >0 means production is above capacity.

Change in Inflation (1999-2001) - (1993-1995),

Figure 5: Equation 1, Mean 1-Step Ahead Forecast Error

S : NAIRU and Productivity Growth at 1994 values

U* : NAIRU at 1994 value

(Annualized Quarterly Growthy Rates, Percent)

Figure 6: U.S. Inflation Rate: Counterfactual Simulations

S : NAIRU and Productivity Growth at 1994 values

U* : NAIRU at 1994 value

Figure 7: Irish Inflation Rate: Counterfactual Simulations

S : NAIRU and Productivity Growth at 1994 values

Figure 8: Netherlands Inflation Rate: Counterfactual Simulations

Constant NAIRU and Productivity Growth

( - means pushed down inflation)

Figure 9: Equation 1, ExPost - Counterfactual Simulation

Unit Labor Costs in Selected OECD Countries

Unit labor costs are quarterly (a.r.) growth rates.

Unit Labor Costs in Selected OECD Countries

Unit labor costs are quarterly (a.r.) growth rates.

Unit Labor Costs in Selected OECD Countries

Unit labor costs are quarterly (a.r.) growth rates.

Unit Labor Costs in Selected OECD Countries

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