Inflation as a Polynomial Function of Production Gap

It is attempted to verify a hypothesis that inflation is a concave-convex function of production gap. A sample of statistics from 12 economies of the Euro zone provided the basis of the study. The values of estimated parameters of base inflation function suggest that under condition of a positive production gap, inflation rate increases at accelerated pace while it fastly decreases during low industrial cycle. The study supports a guess that on average industrial capacities were utilized at a level of ca 81 %. The effective output (defined here as the volume of products sold during a medium term on condition that inflation increases are zero) could have been attained if capacities were utilized at the level of some 84 %.