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The asymmetric effects of demand shocks: international evidence on determinants and implications

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Abstract:

The analysis focuses on the asymmetric effects of demand shocks. The evidence across a sample of 19 industrial countries differentiates the effects of expansionary and contractionary aggregate demand shocks on real output growth and nominal wage and price inflation. The difference appears consistent with a kinked supply curve that is dependent on the asymmetric flexibility of wages and/or prices across countries. Furthermore, the evidence does not support the endogeneity of asymmetric nominal flexibility with respect to demand variability or trend price inflation across countries. On average, across countries, demand variability increases nominal wage and price inflation relative to deflation, while exacerbating output contraction relative to expansion. The apparent trade-off between changes in real and nominal trends provides further support to the supply side explanation of asymmetry.

Document Type: Research Article

DOI: http://dx.doi.org/10.1080/00036840701765502

Affiliations: International Monetary Fund, Washington, DC

Publication date: July 1, 2010

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