Demand Deficiency and Inflation in the G7 Countries

Authors : Erdem BAŞÇI, Sıdıka BAŞÇI

Pages : 59-70

Doi:10.33818/ier.1058542

View : 15 | Download : 12

Publication Date : 2021-12-12

Article Type : Research Paper

Abstract :In this paper, we analyze the relationship between nominal and real GDP growth for G7 countries for the period 1971 – 2018. A visual inspection of the data indicates the presence of a threshold, above which the structure of the relationship between nominal and real GDP growth rates changes from a positive one to a flat one. Moreover, the volatility of real growth is observed to be higher at high rates of nominal GDP growth. We first test for the presence of a two regime non-linearity by using the Sup F test of Andrews insert ignore into journalissuearticles values(1993);. Due to the presence of heteroskedasticity we also apply the Sup MZ test of Ahmed et al. insert ignore into journalissuearticles values(2017);. Both tests operate under an unknown change point and the latter also allows for heteroskedasticity. The results of the tests point to the presence of a ‘demand deficiency ’regime for low nominal demand growth rates and to a ‘harmful inflation ’regime for higher nominal GDP growth rates, these results have strong implications for guiding recent policy discussions on nominal GDP targeting.
Keywords : Growth, Inflation, Macroeconomic Policy, Unknown Structural Change Tests, Nominal GDP Targeting, Growth, Inflation, Macroeconomic Policy, Unknown Structural Change Tests, Nominal GDP Targeting,