The supply side of the economy is usually modeled with a Phillips curve specification,
directly relating price inflation to some measure of real disequilibrium (typically the output gap),
inflation expectations, and real exchange rate changes. Three variants are presented below. The
coefficients á on the right side of all equations, except for the output gap one, are constrained to
sum to unity to ensure the long-run verticality of the Phillips curve, i.e. that inflation is neutral
with respect to real output in the long run.
The supply side of the economy is usually modeled with a Phillips curve specification,
directly relating price inflation to some measure of real disequilibrium (typically the output gap),
inflation expectations, and real exchange rate changes. Three variants are presented below. The
coefficients á on the right side of all equations, except for the output gap one, are constrained to
sum to unity to ensure the long-run verticality of the Phillips curve, i.e. that inflation is neutral
with respect to real output in the long run.
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