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A Possible Explanation of the Missing Deflation Puzzle

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  • Engin Kara
  • Ahmed Jamal Pirzada

Abstract

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.

Suggested Citation

  • Engin Kara & Ahmed Jamal Pirzada, 2016. "A Possible Explanation of the Missing Deflation Puzzle," Bristol Economics Discussion Papers 16/670, Department of Economics, University of Bristol, UK, revised 29 Mar 2017.
  • Handle: RePEc:bri:uobdis:16/670
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    File URL: http://www.efm.bris.ac.uk/economics/working_papers/pdffiles/dp16670.pdf
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    References listed on IDEAS

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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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    Cited by:

    1. Ahmed Jamal Pirzada, 2017. "Energy Price Uncertainty and Decreasing Pass-through to Core Inflation," Bristol Economics Discussion Papers 17/681, Department of Economics, University of Bristol, UK, revised 30 May 2017.
    2. Ahmed Jamal Pirzada, 2017. "Price Stickiness and Intermediate Materials Prices," Bristol Economics Discussion Papers 17/686, Department of Economics, University of Bristol, UK.

    More about this item

    Keywords

    Price Mark-up Shocks; Great Recession; Inflation; DSGE; Intermediate Inputs.;

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