Modeling inflation after the crisis

Description

"In the United States, the rate of price inflation falls in recessions. Turning this observation into a useful inflation forecasting equation is difficult because of multiple sources of time variation in the inflation process, including changes in Fed policy and credibility. We propose a tightly parameterized model in which the deviation of inflation from a stochastic trend (which we interpret as long-term expected inflation) reacts stably to a new gap measure, which we call the unemployment recession gap. The short-term response of inflation to an increase in this gap is stable, but the long-term response depends on the resilience, or anchoring, of trend inflation. Dynamic simulations (given the path of unemployment) match the paths of inflation during post-1960 downturns, including the current one"--National Bureau of Economic Research web site.

Subjects

Series Statement

• NBER working paper series -- working paper 16488
• Working paper series (National Bureau of Economic Research : Online) -- working paper no. 16488.

Links

• External source

Other Editions

• Modeling inflation after the crisisElectronic resourceNational Bureau of Economic Research2010-01-01
• Modeling inflation after the crisisElectronic resourceNational Bureau of Economic Research2010-01-01