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The Hard Road to a Soft Landing: Evidence from a (Modestly) Nonlinear Structural Model

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  • Randal J. Verbrugge
  • Saeed Zaman

Abstract

What drove inflation so high in 2022? Can it drop rapidly without a recession? The Phillips curve is central to the answers; its proper (nonlinear) specification reveals that the relationship is strong and frequency dependent, and inflation is very persistent. We embed this empirically successful Phillips curve – incorporating a supply-shocks variable – into a structural model. Identification is achieved using an underutilized data-dependent method. Despite imposing anchored inflation expectations and a rapid relaxation of supply-chain problems, we find that absent a recession, inflation will be more than 3 percent by the end of 2025. A simple welfare analysis supports a mild recession as preferred to an extended period of elevated inflation, under a typical loss function.

Suggested Citation

  • Randal J. Verbrugge & Saeed Zaman, 2023. "The Hard Road to a Soft Landing: Evidence from a (Modestly) Nonlinear Structural Model," Working Papers 23-03, Federal Reserve Bank of Cleveland.
    • Handle: RePEc:fip:fedcwq:95448
    DOI: 10.26509/frbc-wp-202303
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    More about this item

    Keywords

    Nonlinear Phillips Curve; Frequency Decomposition; Supply Price Pressures; Structural VAR; Nonlinear Impulse Response Functions; Welfare Analysis;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C36 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Instrumental Variables (IV) Estimation

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