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Accounting for inflation dynamic in a fully optimizing macroeconomic framework: evidence from the US states

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  • Salaheddine El Omari
  • Noureddine Benlagha

Abstract

This article proposes a New Keynesian DSGE model that can capture the hump-shaped response of inflation to a monetary policy shock that does not depend upon backward-looking elements for the price and wage-setting, such as the indexation of wages or prices. The two additional elements required to achieve a hump-shaped response are roundabout production structure (input–output structure for production) and working capital. Depending on the model’s parameterization, this channel can provide a pronounced response of inflation. In addition, our article provides some reduced-form evidence about the hump-shaped response of inflation using a VAR with Cholesky ordering.

Suggested Citation

  • Salaheddine El Omari & Noureddine Benlagha, 2024. "Accounting for inflation dynamic in a fully optimizing macroeconomic framework: evidence from the US states," Applied Economics, Taylor & Francis Journals, vol. 56(5), pages 582-598, January.
    • Handle: RePEc:taf:applec:v:56:y:2024:i:5:p:582-598
    DOI: 10.1080/00036846.2023.2169240
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