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The hard road to a soft landing: Evidence from a (modestly) nonlinear structural model

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  • Verbrugge, Randal
  • Zaman, Saeed

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 >3% 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.

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  • Verbrugge, Randal & Zaman, Saeed, 2023. "The hard road to a soft landing: Evidence from a (modestly) nonlinear structural model," Energy Economics, Elsevier, vol. 123(C).
  • Handle: RePEc:eee:eneeco:v:123:y:2023:i:c:s0140988323002311
    DOI: 10.1016/j.eneco.2023.106733
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    Cited by:

    1. Randal Verbrugge & Saeed Zaman, 2024. "Post‐COVID inflation dynamics: Higher for longer," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 43(4), pages 871-893, July.

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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

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