Abstract
Evidence indicates that a positive labour productivity shock leads to a significant decline in consumer price inflation and inflation expectations. Based on the amplifications, the one-year-ahead and current inflation expectations have greater magnifying effects on the pass-through of positive labour productivity shocks on inflation. The actual inflation expectations decline more than the counterfactual responses due to the repo rate tightening. This suggests that improved labour productivity tends to accentuate the decline in inflation expectations. In addition, the labour productivity shock moves inflation and GDP growth in opposite directions, indicating a policy trade-off rather than a shift in the policy frontier curve.
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