{
  "title": "Monetary Policy and Inflation Scares",
  "publication": "IMF Working Papers, December 20, 2024",
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  "summary": "A salient feature of the post-COVID inflation surge is that economic activity has remained resilient despite unfavorable supply-side developments.",
  "sections": [
    {
      "heading": "Summary and central findings",
      "content": "- A salient feature of the post-COVID inflation surge is that economic activity has remained resilient despite unfavorable supply-side developments.\n- The authors develop a macroeconomic model with:\n  - nonlinear price and wage Phillips curves,\n  - endogenous intrinsic indexation,\n  - an unobserved components representation of a cost-push shock.\n- In the model:\n  - a persistent large adverse supply shock can lead to a persistent inflation surge while output expands if the central bank follows an inflation forecast-based policy rule and abstains from hiking policy rates for some time as it (erroneously) expects inflationary pressures to dissipate quickly.\n  - a standard linearized formulation of the model cannot account for these observations under identical assumptions.\n- The nonlinear framework implies:\n  - the standard prescription of \"looking through\" supply shocks is a good policy for small shocks when inflation is near the central bank's target,\n  - but \"looking through\" may be quite risky when economic activity is strong and large shocks drive inflation well above target.\n  - the economic costs of \"going the last mile\" – i.e. a tight stance aimed at returning inflation quickly to target – can be substantial."
    },
    {
      "heading": "Model components and mechanisms",
      "content": "- Structural features:\n  - Nonlinear price Phillips curve.\n  - Nonlinear wage Phillips curve.\n  - Endogenous intrinsic indexation.\n  - Unobserved components representation of a cost-push shock.\n- Mechanism emphasized:\n  - Inflation forecast-based policy rules can lead to delayed policy tightening if the central bank expects inflationary pressures to dissipate, permitting a scenario of rising inflation concurrent with expanding output following a large adverse supply shock.\n- Comparative modeling insight:\n  - The nonlinear specification is necessary to reproduce the combination of resilient output and persistent inflation observed post-COVID; an otherwise identical linearized model fails to generate these dynamics."
    },
    {
      "heading": "Policy implications and recommendations",
      "content": "- \"Looking through\" supply shocks:\n  - Appropriate for small supply shocks when inflation is near the central bank's target.\n  - Potentially risky when shocks are large and economic activity is strong and inflation is well above target.\n- \"Going the last mile\":\n  - A policy of deliberately tightening to return inflation quickly to target can entail substantial economic costs according to the model.\n- Policy design consideration:\n  - Central banks relying on inflation forecast-based rules should be aware that persistent large adverse supply shocks can produce sustained inflationary episodes if policy makers expect rapid dissipation of inflation pressures."
    },
    {
      "heading": "Publication and metadata",
      "content": "- Title: Monetary Policy and Inflation Scares\n- Authors: Christopher J. Erceg, Jesper Lindé, Mathias Trabandt\n- Date: December 20, 2024\n- Series: Working Paper No. 2024/260\n- Issue: 260\n- Volume: 2024\n- Pages: 66\n- DOI: https://doi.org/10.5089/9798400295287.001\n- Stock No: WPIEA2024260\n- ISBN: 9798400295287\n- ISSN: 1018-5941\n- Subject keywords: Central bank policy rate, cost-push shock, COVID inflation surge, Inflation, Inflation Dynamics, Inflation Risk, Inflation targeting, Labor markets, Linearized Model, Monetary Policy, New Keynesian Model, Nonlinear Model, policy rule, State-Dependent Pricing, Supply shocks\n\nIMF Working Paper — Monetary Policy and Inflation Scares (Working Paper No. 2024/260), December 20, 2024.\n\n---\n\n Content in this bundle\n\n- Working Paper\n  - Working Paper (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - Working Paper (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2024/12/20/monetary-policy-and-inflation-scares-559408"
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    "Authors: Christopher J. Erceg, Jesper Lindé, Mathias Trabandt",
    "Published: December 20, 2024",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9798400295287.001",
    "A salient feature of the post-COVID inflation surge is that economic activity has remained resilient despite unfavorable supply-side developments.",
    "The authors develop a macroeconomic model with:",
    "In the model:",
    "The nonlinear framework implies:",
    "Structural features:",
    "Mechanism emphasized:",
    "Comparative modeling insight:",
    "\"Looking through\" supply shocks:",
    "\"Going the last mile\":",
    "Policy design consideration:",
    "Title: Monetary Policy and Inflation Scares",
    "Authors: Christopher J. Erceg, Jesper Lindé, Mathias Trabandt",
    "Date: December 20, 2024",
    "Series: Working Paper No. 2024/260",
    "Issue: 260",
    "Volume: 2024",
    "Pages: 66",
    "DOI: https://doi.org/10.5089/9798400295287.001",
    "Stock No: WPIEA2024260",
    "ISBN: 9798400295287",
    "ISSN: 1018-5941",
    "Subject keywords: Central bank policy rate, cost-push shock, COVID inflation surge, Inflation, Inflation Dynamics, Inflation Risk, Inflation targeting, Labor markets, Linearized Model, Monetary Policy, New Keynesian Model, Nonlinear Model, policy rule, State-Dependent Pricing, Supply shocks",
    "**Working Paper**"
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