Non-Linearities in the Output-Inflation Relationship: Some Empirical Results for Canada

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This paper analyzes the short-run dynamic process of inflation in Canada and examines whether a systematic variation in the relationship between inflation and output can be detected over time. In the theoretical literature, different models of price-setting behaviour predict that the slope of the Phillips curve will be a function of macroeconomic conditions, implying a time-varying sacrifice ratio. Evidence for four different types of asymmetry is presented in the context of short-run Phillips curves estimated in a state-space framework. The results suggest that there is significant time variation in the trade-off in Canada, but that it is difficult to distinguish definitively among the possible models generating the non-linearity.