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This paper presents empirical evidence supporting the proposition that there is a significant asymmetry in the U.S. output-inflation process, which implies that excess demand conditions are much more inflationary than excess supply conditions are disinflationary. The important policy implication of this asymmetry is that it can be very costly if the economy overheats because this will necessitate a severe tightening in monetary conditions in order to reestablish inflation control. The small model of the U.S. outputinflation process developed in the paper shows that the seeds of large recessions, such as that in 1981-82, are planted by allowing the economy to overheat. This type of asymmetry implies that the measure of excess demand which is appropriate in estimating the Phillips curve cannot have a zero mean; instead, this mean must be negative if inflation is to be stationary. The paper also shows that a failure to account for this important implication of asymmetry can explain why some other researchers may have been misled into falsely accepting the linear model. The empirical results presented in the paper show that the conclusions regarding asymmetry are robust to a number of tests for sensitivity to changes in the method used to estimate potential output and in the specification of the Phillips curve.

Inflation --- Macroeconomics --- Production and Operations Management --- Model Construction and Estimation --- Price Level --- Deflation --- Monetary Policy --- Macroeconomics: Production --- Prices, Business Fluctuations, and Cycles: General (includes Measurement and Data) --- Economic growth --- Output gap --- Potential output --- Business cycles --- Capacity utilization --- Prices --- Production --- Economic theory --- Industrial capacity --- United States

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This paper extends the equilibrium business cycle framework to incorporate ex ante skill heterogeneity among workers. Consistent with the empirical evidence, skilled and unskilled workers in the model face the same degree of cyclical variation in real wages although unskilled workers are subject to substantially higher procyclical variation in employment. Systematic cyclical changes in the average skill level of employed workers are shown to induce bias in aggregate measures of cyclical variation in the labor input, productivity, and the real wage. The introduction of skill heterogeneity improves the model’s ability to match the empirical correlation between total hours and the real wage but the correlation between total hours and labor productivity remains higher than in the data.

Labor --- Macroeconomics --- Production and Operations Management --- Business Fluctuations --- Cycles --- Demand and Supply of Labor: General --- Wage Level and Structure --- Wage Differentials --- Wages, Compensation, and Labor Costs: General --- Employment --- Unemployment --- Wages --- Intergenerational Income Distribution --- Aggregate Human Capital --- Aggregate Labor Productivity --- Labor Economics: General --- Macroeconomics: Production --- Labour --- income economics --- Real wages --- Productivity --- Production --- Economic theory --- Labor economics --- Industrial productivity --- United States --- Income economics

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The IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.

Consumption --- Economics --- Expenditure --- Fiscal Policy --- Fiscal policy --- Government consumption --- Industrial productivity --- Labor --- Macroeconomics --- Macroeconomics: Consumption --- Macroeconomics: Production --- National accounts --- National Deficit Surplus --- Nonwage Labor Costs and Benefits --- Pension spending --- Pensions --- Private Pensions --- Production and Operations Management --- Production --- Productivity --- Public Finance --- Saving --- Social Security and Public Pensions --- Wealth --- Sweden

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The present paper takes a fresh theoretical and empirical look into the relationship between Wagner’s law and economic development. It introduces human capital into a classic two-sector model of unbalanced growth. It shows that, as an economy develops, changes in the relative returns to human capital and unskilled labor, as a result of changes to their relative scarcities, could have a significant impact on the size of the government sector, depending in part also on the difference in relative factor intensities between outputs of the private and government sectors. This conjecture is broadly supported by empirical evidence based on a cross-section analysis of a large sample of developed and developing countries.

Civil service & public sector --- Economic sectors --- Expenditure --- Expenditures, Public --- Finance, Public --- Human Capital --- Human capital --- Income economics --- Income --- Industrial productivity --- Labor Productivity --- Labor --- Labour --- Macroeconomics --- Macroeconomics: Production --- National accounts --- National Government Expenditures and Related Policies: General --- Occupational Choice --- Personal income --- Personal Income, Wealth, and Their Distributions --- Production and Operations Management --- Production --- Productivity --- Public Enterprises --- Public finance & taxation --- Public Finance --- Public sector --- Public-Private Enterprises --- Skills --- Structure, Scope, and Performance of Government --- United States

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This paper examines economic developments and policies in Canada during 1990–95. Spurred by the robust growth in the United States and the easing of monetary conditions between 1991 and 1993, economic growth in Canada continued to strengthen during 1994. Real GDP grew by 4.5 percent in 1994 after growing by 2.2 percent in 1993 and 0.6 percent in 1992. Economic growth in 1994 was led by exports and investment in machinery and equipment. However, growth was more broadly based in 1994; private consumption strengthened, and there was a rebound in residential and nonresidential construction.

Exports and Imports --- Labor --- Macroeconomics --- Taxation --- Production and Operations Management --- Macroeconomics: Production --- Business Taxes and Subsidies --- Taxation, Subsidies, and Revenue: General --- Unemployment: Models, Duration, Incidence, and Job Search --- Production --- Cost --- Capital and Total Factor Productivity --- Capacity --- Public finance & taxation --- Labour --- income economics --- International economics --- Pensions --- Potential output --- Total factor productivity --- Output gap --- Value-added tax --- Personal income --- National accounts --- Taxes --- Employment --- Economic theory --- Income --- Income tax --- Unemployment --- Spendings tax --- Industrial productivity --- Canada --- Income economics