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Accounting for Post-Crisis Inflation: A Retro Analysis

Author

Listed:
  • Chiara Fratto

    (University of Chicago)

  • Harald Uhlig

    (University of Chicago)

Abstract

Why was there no deflation and what accounts for inflation after 2008? Is the missing deflation puzzle an indictment of Phillips-curve-type analysis, or is all well and good if one fixes the model with the appropriate features? To shed light on this issue and in order to avoid confounding the answer with post-crisis model adaptations, we provide a "retro analysis" and employ the original benchmark of Smets and Wouters (2007) model. We show that this model implies that shocks to price and wage markups alone are nearly enough to account for inflation before 2008, and that they do so substantially post 2007 as well. While markup shocks account for most of the inflation movements, they do not play a significant role in the accounting of employment: the Phillips curve tradeoff is weak after 2007 according to the model, but also before 2007. We thus argue that the asserted post-crisis model failures were visible pre-crisis already. Extending the retro analysis with features introduced by the most recent part of the literature does little to alter our key insights. (Copyright: Elsevier)

Suggested Citation

  • Chiara Fratto & Harald Uhlig, 2020. "Accounting for Post-Crisis Inflation: A Retro Analysis," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 35, pages 133-153, January.
  • Handle: RePEc:red:issued:18-217
    DOI: 10.1016/j.red.2019.05.005
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    Cited by:

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    2. Gregor Boehl & Felix Strobel, 2020. "US Business Cycle Dynamics at the Zero Lower Bound," CRC TR 224 Discussion Paper Series crctr224_2020_192, University of Bonn and University of Mannheim, Germany.
    3. Guilloux-Nefussi, Sophie, 2020. "Globalization, market structure and inflation dynamics," Journal of International Economics, Elsevier, vol. 123(C).
    4. Galbács Peter, 2021. "What did it take for Lucas to set up ‘useful’ analogue systems in monetary business cycle theory?," Economics and Business Review, Sciendo, vol. 7(3), pages 61-82, September.
    5. Nicoletta Batini & Alessandro Cantelmo & Giovanni Melina & Stefania Villa, 2021. "How loose, how tight? A measure of monetary and fiscal stance for the euro area," Oxford Economic Papers, Oxford University Press, vol. 73(4), pages 1536-1556.
    6. Boris Chafwehé & Charles de Beauffort & Rigas Oikonomou, 2021. "Debt Management in a World of Fiscal Dominance," JRC Working Papers on Taxation & Structural Reforms 2021-11, Joint Research Centre (Seville site).
    7. Böhl, Gregor & Strobel, Felix, 2020. "US business cycle dynamics at the zero lower bound," IMFS Working Paper Series 143, Goethe University Frankfurt, Institute for Monetary and Financial Stability (IMFS).
    8. Gasteiger, Emanuel & Grimaud, Alex, 2020. "Price setting frequency and the Phillips Curve," ECON WPS - Working Papers in Economic Theory and Policy 03/2020, TU Wien, Institute of Statistics and Mathematical Methods in Economics, Economics Research Unit.

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