INFLATION DYNAMICS AND THE OUTPUT-INFLATION TRADE-OFF: INTERNATIONAL PANEL DATA EVIDENCE

We explore the impact of inflation and its variability on the output-inflation trade-off using a single-step approach in a panel data context. Previous empirical approaches focus on either cross-country or country-by-country time-series analyses. We employ a dynamic heterogeneous panel specification using an all-encompassing estimation framework accounting for parameter heterogeneity, cross-sectional dependence, dynamics, and nonstationarity. Our sample covers 60 countries from 1970 to 2010. While inflation variability reduces the trade-off for specific periods and country groups, an unambiguous and more pronounced negative relation emerges between the inflation rate and the trade-off. The findings are consistent with the New Keynesian view. (JEL E31, E12, C23)