@article{TheProductivity-InflationNexusRevisited:Canada:657,
      recid = {657},
      author = {Novin, Farid},
      title = {The Productivity-Inflation Nexus Revisited: Canada,  1969-1988},
      publisher = {Bank of Canada},
      address = {1991},
      pages = {1 online resource (44 pages)},
      abstract = {This paper investigates the relationship between  productivity and inflation for the 1969-88 period. In an  earlier study, which covered the 1963-79 period, Jarrett  and Selody estimated a bivariate vector autoregressive  (VAR) model and found that a permanent one percentage point  positive shock to inflation translates into a 0.23  percentage point reduction in productivity growth. This  study examines whether this result remains valid for the  extended sample. In this paper it is argued that the linear  relationship between productivity and inflation identified  by Jarrett and Selody changed in the 1980s owing to a fall  in the relative cost of capital and a sharp increase in the  ratio of consumer prices to producer prices. These effects  are controlled for by substituting total factor  productivity for the labour productivity measure chosen by  Jarrett and Selody, and by including the consumer real wage  in the VAR. Thus, the updated model is a trivariate VAR  encompassing rates of change of the GDP price deflator, the  consumer real wage, and total factor productivity. The data  do not reject the null hypothesis that these variables are  cointegrated and the long-run predictions of the estimated  model are in line with those of Jarrett and Selody.  Specifically, the trivariate VAR predicts that a permanent  one percentage point increase in inflation reduces  productivity growth by 0.3 percentage points. In this  paper, information about the dynamics of the VAR system is  provided by simulating one-period shocks to the VAR with  orthogonalized innovations, obtained using the Choleski  technique. It is shown that even a one-period shock to  inflation affects productivity growth. The effect of a one  percentage point increase in inflation for one period  stabilizes after 5 years at about -0.02 percentage points.  Based on a Monte-Carlo exercise to obtain the relevant  distribution of the 5th-year effect of inflation on the  growth of productivity, it is shown that this negative  response is statistically significant.},
      url = {http://www.oar-rao.bank-banque-canada.ca/record/657},
      doi = {https://doi.org/10.34989/swp-1991-1},
}