Inflation Dynamics and the Great Recession

June 1, 2011

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Format: Chicago

Sandeep Mazumder, and Laurence M. Ball Inflation Dynamics and the Great Recession, (USA: International Monetary Fund, 2011) accessed September 19, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper examines inflation dynamics in the United States since 1960, with a particular focus on the Great Recession. A puzzle emerges when Phillips curves estimated over 1960-2007 are ussed to predice inflation over 2008-2010: inflation should have fallen by more than it did. We resolve this puzzle with two modifications of the Phillips curve, both suggested by theories of costly price adjustment: we measure core inflation with the median CPI inflation rate, and we allow the slope of the Phillips curve to change with the level and vairance of inflation. We then examine the hypothesis of anchored inflation expectations. We find that expectations have been fully "shock-anchored" since the 1980s, while "level anchoring" has been gradual and partial, but significant. It is not clear whether expectations are sufficiently anchored to prevent deflation over the next few years. Finally, we show that the Great Recession provides fresh evidence against the New Keynesian Phillips curve with rational expectations.

Subject: Economic theory, Inflation, Labor, Labor share, Output gap, Prices, Production, Supply shocks, Unemployment

Keywords: Core CPI, Forecasted inflation, Great Recession, Inflation, Inflation behavior, Inflation expectation, Labor share, Median inflation, Output gap, Phillips curve, Supply shocks, Unemployment, WP, XFE inflation

Publication Details

Pages:

56
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2011/121
Stock No:

WPIEA2011121
ISBN:

9781455263387
ISSN:

1018-5941

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