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DOUGLAS LAXTON, GUY MEREDITH, and DAVID ROSE

Data for the G–7 countries strongly support the view that economic activity has a nonlinear effect on inflation, with high levels of activity raising inflation by more than low levels decrease it. In the face of such asymmetries, the average level of output in an economy subject to demand shocks will be below the level of output at which there is no tendency for inflation to rise or fall, contrary to linear model predictions. One implication is that policymakers can raise the average level of output over time by responding promptly to demand shocks, reducing the variance of output around trend.

PETER CLARK, DOUGLAS LAXTON, and DAVID ROSE

This paper presents empirical evidence supporting the proposition that there is a significant asymmetry in the U.S. output-inflation process. The important policy implication of this asymmetry is that it can be very costly if the economy overheats because this will necessitate a severe tightening in monetary conditions in order to re-establish inflation control. The empirical results presented in the paper show that the conclusions regarding asymmetry are robust to a number of tests for sensitivity to changes in the method used to estimate potential output and in the specification of the Phillips curve,

Luis A.V. Catão

'Global Governance: Who's in Charge?' examines the challenges—financial, health, environmental, and trade—facing the international community in the 21st century and asks whether today';s system of global governance is equipped to cope with them. The lead article asserts that the system that served as a model for much of the 20th century is out of date, and it explores what needs to be done to strengthen it. Other articles on this theme look at the recent U.S. subprime market crisis, the differences between financial crises of the 19th and 20th centuries and what future crises will look like, the need for a stronger system of multilateral trade, and how global health threats can be handled. 'People in Economics' profiles Michael Kremer; 'Picture This' describes the changing aid landscape; 'Country Focus' spotlights the United Arab Emirates; and 'Straight Talk' examines the impact of high food prices. Also in this issue, articles examine development in Africa, and 'backcasting' data in Latin America.

Mr. Ralph Chami and Connel Fullenkamp

For the latest thinking about the international financial system, monetary policy, economic development, poverty reduction, and other critical issues, subscribe to Finance & Development (F&D). This lively quarterly magazine brings you in-depth analyses of these and other subjects by the IMF’s own staff as well as by prominent international experts. Articles are written for lay readers who want to enrich their understanding of the workings of the global economy and the policies and activities of the IMF.

Nir Klein
This paper provides an assessment of the South African potential output for the period 1985-2010 by applying both structural and nonstructural estimation techniques. The analysis suggests that, while potential output growth steadily accelerated in the post-apartheid era to about 3 1/2 percent (1994-2008), it has decelerated considerably following the outbreak of the financial crisis, as was observed in other advanced and emerging economies. While this indicates that, at around -1 1/ 2 percent, the estimated 2010 output gap was lower than previously thought, there is a fair amount of uncertainty regarding its "true" magnitude, reflecting in part the backward looking nature of the estimation methods. The paper concludes that the potential growth is likely to gradually revert to its precrisis pace and the output gap to have closed by early 2012.
International Monetary Fund. External Relations Dept.

While the Asian financial crisis of 1997–98 generated a plethora of research analyzing its causes, less attention has been paid to its aftermath. How long did the associated recessions last, and to what extent have the levels of output been lowered in the affected countries? In a recent IMF Working Paper, Valerie Cerra (Economist, European I Department) and Sweta Chaman Saxena (Assistant Professor, University of Pittsburgh) analyze whether the recession following the Asian crisis temporarily or permanently lowered output levels. They talked with the IMF Survey about their study.

IMF Research Perspective (formerly published as IMF Research Bulletin) is a new, redesigned online newsletter covering updates on IMF research. In the inaugural issue of the newsletter, Hites Ahir interviews Valeria Cerra; and they discuss the economic environment 10 years after the global financial crisis. Research Summaries cover the rise of populism; economic reform; labor and technology; big data; and the relationship between happiness and productivity. Sweta C. Saxena was the guest editor for this inaugural issue.
International Monetary Fund
This paper estimated the output gap in Lithuania using three different methodologies—an HP filter, a panel regression, and a production function. This study examines how the levels of the current account deficit and the real exchange rate in Lithuania compare with estimates of their equilibrium values. The regression-based estimates are sensitive to the regression specifications and samples that determine equilibrium values. The large current account deficit in Lithuania may well be the equilibrium outcome of rapid income catch-up driven by strong fundamentals, including EU accession.