Does Global Slack Matter More Than Domestic Slack In Determining U.S. Inflation?
Source: University of California
This paper employs a structural model to estimate whether global output gap has become an important determinant of U.S. inflation dynamics. The results provide support for the relevance of global slack as a determinant of U.S. inflation after 1985. The role of domestic output gap, instead, seems to have diminished over time. Closed-economy New Keynesian models typically describe the domestic inflation rate as being determined by future inflation expectations and by a measure of the domestic output gap.