## Understanding Post-COVID Inflation Dynamics

_IMF Working Papers, January 20, 2023_

## Source details

**Canonical URL:** [Understanding Post-COVID Inflation Dynamics](https://www.imf.org/en/publications/wp/issues/2023/01/20/understanding-post-covid-inflation-dynamics-528404)

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## Bibliographic details
- Authors: Martin Harding, Jesper Lindé, Mathias Trabandt
- Published: January 20, 2023
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798400231162.001

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### Model description
- Proposes a macroeconomic model with a nonlinear Phillips curve that:
  - Has a flat slope when inflationary pressures are subdued.
  - Steepens when inflationary pressures are elevated.
- The nonlinear Phillips curve arises due to a quasi-kinked demand schedule for goods produced by firms.
- The model implies stronger transmission of shocks when inflation is high, generating conditional heteroskedasticity in inflation and inflation risk.
- The model can generate more sizeable inflation surges due to cost-push and demand shocks than a standard linearized model.

### Key findings
- The model can jointly account for:
  - The modest decline in inflation during the Great Recession.
  - The surge in inflation during the Post-Covid period.
- Because transmission of shocks is stronger at high inflation, inflation and inflation risk become conditionally heteroskedastic.
- The model implies the central bank faces a more severe trade-off between inflation and output stabilization when inflation is high.

### Policy implications
- Monetary policy faces a heightened stabilization trade-off in high-inflation episodes: tighter trade-offs between inflation control and output stabilization.
- Nonlinear dynamics imply that policy responses calibrated on linearized models may understate the potential size of inflation surges from cost-push and demand shocks.

### Subject and keywords (as provided)
- Subject: Central bank policy rate, Demand elasticity, Economic theory, Financial services, Inflation, Interest rate floor, Monetary policy, Output gap, Prices, Production
- Keywords: Central bank policy rate, cost-push shock, Demand elasticity, Global, Inflation, Inflation dynamics, inflation risk, inflation-output gap trade-off, Interest rate floor, linearized model, monetary policy, nonlinear model, nonlinear Phillips curve, Output gap, real rigidities

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- **Working Paper**
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_Source: https://www.imf.org/en/publications/wp/issues/2023/01/20/understanding-post-covid-inflation-dynamics-528404_