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I am highly indebted to Maria Carkovic, who made this paper possible and provided invaluable suggestions. I am also grateful to Jacques Artus, Martin Hardy, and Paolo Mauro for helpful discussions and comments. Thanks also to Madhuri Edwards for valuable research assistance and Valerie Ball for skillful editorial assistance.
All variables are in logarithm, except for unemployment and the output gap.
Potential growth is here estimated by a log-linear trend since 1975, with a break in 1984. The trend is 2.7 percent since 1984. This method gives fairly the same result than more elaborate filtering like the Hodrick-Prescott filter, and the output gap is close to the values proposed by the OECD and the WEO for Spain.
The sacrifice ratio computed here differs from the standard ratio that relates the accumulated output loss to the decline in inflation (see, for example, Ball (1994)). The standard ratio assumes backward looking price expectations, and this may not be an adequate representation of price formation in Spain.
Similar results are obtained when the unemployment rate (which can be considered as stationary during this period) is substituted for the output gap.
The figure actually shows a failure of the equation from the beginning of 1996 rather than from 1995. Yet, a one-point increase in the VAT rates along with a rise in excise duties, pushed transitorily the inflation rate up during 1995, with a maximum impact close to 0.7 percent in a year.
After initial computation with the 24 components of PPI, we eliminated an obvious outlier (industry of metal extraction). Its weight is only 0.2 percent in the total PPI.
If the distribution is symmetric, then the skewness equals zero. If the distribution is skewed toward positive values, then the skewness increases, and vice versa. We also smoothed the initial series with a moving average filter.
However, the share of wage income did not catch up with the levels observed earlier. This would point to some form of wage moderation.
The estimation includes the relative price of foods as an exogenous variable as well. This is done because relative food prices were found to be significant in the estimation of Chapter III.
The apparent deviation between the dynamic forecast and observed values for real wages are not statistically significant. Observed values still fall within the confidence interval of the estimated values.
Studies on the gains associated to changes in the status of the central bank or the adoption of a strategy of inflation targeting generally do not show immediate credibility effects. For example, Debelle (1996) finds no output gains comparing disinflation episodes in countries with varying degrees of central bank autonomy and inflation targeting, i.e., Australia, New Zealand, and Canada; Fischer (1996) finds that industrial countries with independent central banks have higher sacrifice ratio than those with less autonomous central banks.