Table 17 shows the response of the GDP deflator inflation rate over the previous year at 1 and 3 years, in S1 and S2. After a spending shock, and under the benchmark value of the spending elasticity of -.5 (panel A), in S1 there is evidence of a positive response of
inflation only in the UK and, initially, in Germany. In S2, there is evidence of a positive
response only in Germany and Australia at 3 years; in many of the other cases, the
response is negative. Notice the large and statistically significant decline in the inflation
response relative to S1 in the US and Canada, two countries that also experience a large
fall in the GDP response in S2. Conversely, Australia, the only country with positive
cumulative GDP response at 3 years in S2, is also the only country with a significantly
positive inflation response at the same horizon.