Understanding Post-Covid Inflation Dynamics
Martín Harding, Jesper Lindé, Mathias Trabandt
Journal of Monetary Economics,
November
2023
Abstract
We propose a macroeconomic model with a nonlinear Phillips curve that has a flat slope when inflationary pressures are subdued and steepens when inflationary pressures are elevated. The nonlinear Phillips curve in our model arises due to a quasi-kinked demand schedule for goods produced by firms. Our model can jointly account for the modest decline in inflation during the Great Recession and the surge in inflation during the post-COVID period. Because our model implies a stronger transmission of shocks when inflation is high, it generates conditional heteroskedasticity in inflation and inflation risk. Hence, our model can generate more sizeable inflation surges due to cost-push and demand shocks than a standard linearized model. Finally, our model implies that the central bank faces a more severe trade-off between inflation and output stabilization when inflation is elevated.
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Understanding Post-Covid Inflation Dynamics
Martín Harding, Jesper Lindé, Mathias Trabandt
Abstract
We propose a macroeconomic model with a nonlinear Phillips curve that has a flat slope when inflationary pressures are subdued and steepens when inflationary pressures are elevated. The nonlinear Phillips curve in our model arises due to a quasi-kinked demand schedule for goods produced by firms. Our model can jointly account for the modest decline in inflation during the Great Recession and the surge in inflation during the Post-Covid period. Because our model implies a stronger transmission of shocks when inflation is high, it generates conditional heteroscedasticity in inflation and inflation risk. Hence, our model can generate more sizeable inflation surges due to cost-push and demand shocks than a standard linearized model. Finally, our model implies that the central bank faces a more severe trade-off between inflation and output stabilization when inflation is high.
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Inflation Puzzles, the Phillips Curve and Output Expectations: New Perspectives from the Euro Zone
Alessandro Sardone, Roberto Tamborini, Giuliana Passamani
Empirica,
February
2022
Abstract
Confidence in the Phillips Curve (PC) as predictor of inflation developments along the business cycle has been shaken by recent “inflation puzzles” in advanced countries, such as the “missing disinflation” in the aftermath of the Great Recession and the “missing inflation” in the years of recovery, to which the Euro-Zone “excess deflation” during the post-crisis depression may be added. This paper proposes a newly specified Phillips Curve model, in which expected inflation, instead of being treated as an exogenous explanatory variable of actual inflation, is endogenized. The idea is simply that if the PC is used to foresee inflation, then its expectational component should in some way be the result of agents using the PC itself. As a consequence, the truly independent explanatory variables of inflation turn out to be the output gaps and the related forecast errors by agents, with notable empirical consequences. The model is tested with the Euro-Zone data 1999–2019 showing that it may provide a consistent explanation of the “inflation puzzles” by disentangling the structural component from the expectational effects of the PC.
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Phillips Curve and Output Expectations: New Perspectives from the Euro Zone
Giuliana Passamani, Alessandro Sardone, Roberto Tamborini
DEM Working Papers,
No. 6,
2020
published in: Empirica
Abstract
When referring to the inflation trends over the last decade, economists speak of "puzzles": a “missing disinflation” puzzle in the aftermath of the Great Recession, and a ”missing inflation” one in the years of recovery to nowadays. To this, a specific "excess deflation" puzzle may be added during the post-crisis depression in the Euro Zone. The standard Phillips Curve model, in this context, has failed as the basic tool to produce reliable forecasts of future price developments, leading many scholars to consider this instrument to be no more adequate. The purpose of this paper is to contribute to this literature through the development of a newly specified Phillips Curve model, in which the inflation-expectation component is rationally related to the business cycle. The model is tested with the Euro Zone data 1999-2019 showing that inflation turns out to be consistently determined by output gaps and and experts' survey-based forecast errors, and that the puzzles can be explained by the interplay between these two variables.
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Should We Use Linearized Models To Calculate Fiscal Multipliers?
Jesper Lindé, Mathias Trabandt
Journal of Applied Econometrics,
No. 7,
2018
Abstract
We calculate the magnitude of the government consumption multiplier in linearized and nonlinear solutions of a New Keynesian model at the zero lower bound. Importantly, the model is amended with real rigidities to simultaneously account for the macroeconomic evidence of a low Phillips curve slope and the microeconomic evidence of frequent price changes. We show that the nonlinear solution is associated with a much smaller multiplier than the linearized solution in long‐lived liquidity traps, and pin down the key features in the model which account for the difference. Our results caution against the common practice of using linearized models to calculate fiscal multipliers in long‐lived liquidity traps.
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Inflation Dynamics During the Financial Crisis in Europe: Cross-sectional Identification of Long-run Inflation Expectations
Geraldine Dany-Knedlik, Oliver Holtemöller
IWH Discussion Papers,
No. 10,
2017
Abstract
We investigate drivers of Euro area inflation dynamics using a panel of regional Phillips curves and identify long-run inflation expectations by exploiting the crosssectional dimension of the data. Our approach simultaneously allows for the inclusion of country-specific inflation and unemployment-gaps, as well as time-varying parameters. Our preferred panel specification outperforms various aggregate, uni- and multivariate unobserved component models in terms of forecast accuracy. We find that declining long-run trend inflation expectations and rising inflation persistence indicate an altered risk of inflation expectations de-anchoring. Lower trend inflation, and persistently negative unemployment-gaps, a slightly increasing Phillips curve slope and the downward pressure of low oil prices mainly explain the low inflation rate during the recent years.
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Did the Crisis Affect Potential Output?
Makram El-Shagi
Applied Economics Letters,
No. 8,
2011
Abstract
Conventional Phillips-curve models that are used to estimate the output gap detect a substantial decline in potential output due to the present crisis. Using a multivariate state space model, we show that this result does not hold if the long run role of excess liquidity (that we estimate endogeneously) for inflation is taken into account.
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Are Qualitative Inflation Expectations Useful to Predict Inflation?
Rolf Scheufele
Journal of Business Cycle Measurement and Analysis,
No. 1,
2011
Abstract
This paper examines the properties of qualitative inflation expectations collected from economic experts for Germany. It describes their characteristics relating to rationality and Granger causality. An out-of-sample simulation study investigates whether this indicator is suitable for inflation forecasting. Results from other standard forecasting models are considered and compared with models employing survey measures. We find that a model using survey expectations outperforms most of the competing models. Moreover, we find some evidence that the survey indicator already contains information from other model types (e. g. Phillips curve models). However, the forecast quality may be further improved by completely taking into account information from some financial indicators.
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The Phillips Curve as a Macroeconometric Relation: Evolution and Recent Econometric Developments
Jean-Marie Dufour, Rolf Scheufele
Einzelveröffentlichungen,
No. 1,
2009
Abstract
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Inflation Expectations: Does the Market Beat Professional Forecasts?
Makram El-Shagi
North American Journal of Economics and Finance,
No. 3,
2011
Abstract
The present paper compares expected inflation to (econometric) inflation forecasts based on a number of forecasting techniques from the literature using a panel of ten industrialized countries during the period of 1988 to 2007. To capture expected inflation, we develop a recursive filtering algorithm which extracts unexpected inflation from real interest rate data, even in the presence of diverse risks and a potential Mundell-Tobin-effect.
The extracted unexpected inflation is compared to the forecasting errors of ten
econometric forecasts. Beside the standard AR(p) and ARMA(1,1) models, which
are known to perform best on average, we also employ several Phillips curve based approaches, VAR, dynamic factor models and two simple model avering approaches.
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