The inflation-output trade-off : is the Phillips curve symmetric? A policy lesson from New Zealand

Release date
01/01/1997
Reference
G97/2
Author
Weshah Razzak
New Zealand data show that the inflation-output relationship is asymmetric. This asymmetry implies that positive demand shocks tend to increase inflation by more than negative demand shocks of similar magnitudes reduce it. An important implication of this asymmetry is that a monetary authority with the objective of maintaining the inflation rate within a narrow band needs to react more promptly to demand shocks than otherwise be necessary. Alternatively, policy that is slow to respond to demand disturbances will result in higher inflation, and greater losses of output than would be the case with a linear Phillips curve.