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A Possible Explanation of the Missing Deflation Puzzle

Listed author(s):
  • Engin Kara
  • Ahmed Jamal Pirzada

During the Great Recession, despite the large fall in output, the fall in inflation was modest. This is known as the missing deflation puzzle. In this paper, we develop and estimate a New Keynesian model to provide an explanation for the puzzle. The new model allows for time-varying volatility in cross-sectional idiosyncratic uncertainty and accounts for changes in intermediate goods prices. We show that inflation did not fall much because intermediate goods prices were increasing during the Great Recession.

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File URL: http://www.efm.bris.ac.uk/economics/working_papers/pdffiles/dp16670.pdf
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Paper provided by Department of Economics, University of Bristol, UK in its series Bristol Economics Discussion Papers with number 16/670.

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Length: 43 pages
Date of creation: 01 Mar 2016
Date of revision: 29 Mar 2017
Handle: RePEc:bri:uobdis:16/670
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  1. Olivier Coibion & Yuriy Gorodnichenko, 2015. "Is the Phillips Curve Alive and Well after All? Inflation Expectations and the Missing Disinflation," American Economic Journal: Macroeconomics, American Economic Association, vol. 7(1), pages 197-232, January.
  2. Huang, Kevin X.D. & Liu, Zheng, 2005. "Inflation targeting: What inflation rate to target?," Journal of Monetary Economics, Elsevier, vol. 52(8), pages 1435-1462, November.
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