## Inflation Dynamics and the Great Recession

_IMF Working Papers, June 1, 2011_

## Source details

**Canonical URL:** [Inflation Dynamics and the Great Recession](https://www.imf.org/en/publications/wp/issues/2016/12/31/inflation-dynamics-and-the-great-recession-24891)

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## Bibliographic details
- Authors: Sandeep Mazumder, Laurence M. Ball
- Published: June 1, 2011
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781455263387.001

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### Study objective and scope
- Examines inflation dynamics in the United States since 1960, with a particular focus on the Great Recession.
- Investigates why Phillips curves estimated over 1960-2007 predict a larger fall in inflation over 2008-2010 than was observed.

### Key methodological modifications
- Measure of core inflation:
  - Use the median CPI inflation rate as the measure of core inflation.
- Allowing Phillips curve slope variation:
  - Permit the slope of the Phillips curve to change with the level and vairance of inflation.
- Hypotheses tested:
  - Anchored inflation expectations, distinguishing between "shock-anchored" and "level anchoring".

### Principal findings
- Phillips curve puzzle:
  - Phillips curves estimated over 1960-2007 imply inflation should have fallen by more during 2008-2010 than actually occurred.
  - The puzzle is resolved by the two modifications above (median CPI core measure and slope variation).
- Inflation expectations:
  - Expectations have been fully "shock-anchored" since the 1980s.
  - "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.
- Implications for New Keynesian models:
  - The Great Recession provides fresh evidence against the New Keynesian Phillips curve with rational expectations.

### Subject areas and keywords
- 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

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/31/inflation-dynamics-and-the-great-recession-24891_