IDEAS home Printed from https://ideas.repec.org/p/cpr/ceprdp/14074.html

Inflation at Risk

Author

Listed:
  • López-Salido, J David
  • Loria, Francesca

Abstract

We find that the recent muted response of the conditional mean of inflation to economic conditions does not convey an adequate representation of the overall pattern of inflation dynamics. Analyzing data from the 1970s reveals ample variability in the entire conditional distribution of inflation. Focusing on the period from 2000 onward bolsters this evidence. Using time-series data for the United States and the Euro Area, we document that looking at the entire conditional distribution of inflation uncovers – after controlling for the state of the labor market and inflation expectations – that heightened financial conditions carry substantial and persistent low-inflation risks, a feature overlooked by much of the literature. Our paper offers a new empirical perspective to existing macroeconomic models, showing that changes in credit conditions are also key to understand the dynamics of the inflation tails.

Suggested Citation

  • López-Salido, J David & Loria, Francesca, 2019. "Inflation at Risk," CEPR Discussion Papers 14074, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:14074
    as

    Download full text from publisher

    File URL: https://cepr.org/publications/DP14074
    Download Restriction: CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org
    ---><---

    As the access to this document is restricted, you may want to

    for a different version of it.

    References listed on IDEAS

    as
    1. Michael McLeay & Silvana Tenreyro, 2020. "Optimal Inflation and the Identification of the Phillips Curve," NBER Macroeconomics Annual, University of Chicago Press, vol. 34(1), pages 199-255.
    2. Berkowitz, J. & Birgean, I. & Kilian, L., 1999. "On the Finite-Sample Accuracy of Nonparametric Resampling Algorithms for Economic Time Series," Papers 99-01, Michigan - Center for Research on Economic & Social Theory.
    3. McLeay, Michael & Tenreyro, Silvana, 2018. "Optimal inflation and the identification of the Phillips Curve," LSE Research Online Documents on Economics 90373, London School of Economics and Political Science, LSE Library.
    4. Simon Gilchrist & Benoit Mojon, 2018. "Credit Risk in the Euro Area," Economic Journal, Royal Economic Society, vol. 128(608), pages 118-158, February.
    5. Wolters Maik H. & Tillmann Peter, 2015. "The changing dynamics of US inflation persistence: a quantile regression approach," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 19(2), pages 161-182, April.
    6. Marco Del Negro & Marc P. Giannoni & Frank Schorfheide, 2015. "Inflation in the Great Recession and New Keynesian Models," American Economic Journal: Macroeconomics, American Economic Association, vol. 7(1), pages 168-196, January.
    7. Adelchi Azzalini & Antonella Capitanio, 2003. "Distributions generated by perturbation of symmetry with emphasis on a multivariate skew t‐distribution," Journal of the Royal Statistical Society Series B, Royal Statistical Society, vol. 65(2), pages 367-389, May.
    8. repec:spo:wpecon:info:hdl:2441/5rkqqmvrn4tl22s9mc4b6ga2g is not listed on IDEAS
    9. Laurence Ball & Sandeep Mazumder, 2019. "A Phillips Curve with Anchored Expectations and Short‐Term Unemployment," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 51(1), pages 111-137, February.
    10. repec:spo:wpmain:info:hdl:2441/5rkqqmvrn4tl22s9mc4b6ga2g is not listed on IDEAS
    11. Olivier Blanchard & Eugenio Cerutti & Lawrence Summers, 2015. "Inflation and Activity – Two Explorations and their Monetary Policy Implications," NBER Working Papers 21726, National Bureau of Economic Research, Inc.
    12. Rossi, Barbara & Sekhposyan, Tatevik, 2019. "Alternative tests for correct specification of conditional predictive densities," Journal of Econometrics, Elsevier, vol. 208(2), pages 638-657.
    13. Kilian,Lutz & Lütkepohl,Helmut, 2018. "Structural Vector Autoregressive Analysis," Cambridge Books, Cambridge University Press, number 9781107196575, January.
    14. James H. Stock & Mark W. Watson, 2019. "Slack and Cyclically Sensitive Inflation," NBER Working Papers 25987, National Bureau of Economic Research, Inc.
    15. Victor Chernozhukov & Iv·n Fern·ndez-Val & Alfred Galichon, 2010. "Quantile and Probability Curves Without Crossing," Econometrica, Econometric Society, vol. 78(3), pages 1093-1125, May.
    16. Simon Gilchrist & Egon Zakrajsek, 2012. "Credit Spreads and Business Cycle Fluctuations," American Economic Review, American Economic Association, vol. 102(4), pages 1692-1720, June.
    17. Korobilis, Dimitris, 2017. "Quantile regression forecasts of inflation under model uncertainty," International Journal of Forecasting, Elsevier, vol. 33(1), pages 11-20.
    18. Simon Gilchrist & Raphael Schoenle & Jae Sim & Egon Zakrajšek, 2017. "Inflation Dynamics during the Financial Crisis," American Economic Review, American Economic Association, vol. 107(3), pages 785-823, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Andrea Carriero & Todd E. Clark & Massimiliano Marcellino, 2024. "Capturing Macro‐Economic Tail Risks with Bayesian Vector Autoregressions," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 56(5), pages 1099-1127, August.
    2. Alex Tagliabracci, 2020. "Asymmetry in the conditional distribution of euro-area inflation," Temi di discussione (Economic working papers) 1270, Bank of Italy, Economic Research and International Relations Area.
    3. Danilo Cascaldi-Garcia & Cisil Sarisoy & Juan M. Londono & Bo Sun & Deepa D. Datta & Thiago Ferreira & Olesya Grishchenko & Mohammad R. Jahan-Parvar & Francesca Loria & Sai Ma & Marius Rodriguez & Ilk, 2023. "What Is Certain about Uncertainty?," Journal of Economic Literature, American Economic Association, vol. 61(2), pages 624-654, June.
    4. repec:bny:wpaper:0116 is not listed on IDEAS
    5. Rottner, Matthias, 2023. "Financial crises and shadow banks: A quantitative analysis," Journal of Monetary Economics, Elsevier, vol. 139(C), pages 74-92.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. J. David López-Salido & Francesca Loria, 2020. "Inflation at Risk," Finance and Economics Discussion Series 2020-013, Board of Governors of the Federal Reserve System (U.S.).
    2. López-Salido, David & Loria, Francesca, 2024. "Inflation at risk," Journal of Monetary Economics, Elsevier, vol. 145(S).
    3. Boehl, Gregor & Lieberknecht, Philipp, 2025. "The hockey stick Phillips curve and the effective lower bound," Journal of Economic Dynamics and Control, Elsevier, vol. 170(C).
    4. Conti, Antonio M., 2021. "Resurrecting the Phillips Curve in Low-Inflation Times," Economic Modelling, Elsevier, vol. 96(C), pages 172-195.
    5. Marco Del Negro & Michele Lenza & Giorgio E. Primiceri & Andrea Tambalotti, 2020. "What's Up with the Phillips Curve?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 51(1 (Spring), pages 301-373.
    6. Bańbura, Marta & Bobeica, Elena, 2023. "Does the Phillips curve help to forecast euro area inflation?," International Journal of Forecasting, Elsevier, vol. 39(1), pages 364-390.
    7. Ascari, Guido & Fosso, Luca, 2024. "The international dimension of trend inflation," Journal of International Economics, Elsevier, vol. 148(C).
    8. Antonio M. Conti & Concetta Gigante, 2018. "Weakness in Italy�s core inflation and the Phillips curve: the role of labour and financial indicators," Questioni di Economia e Finanza (Occasional Papers) 466, Bank of Italy, Economic Research and International Relations Area.
    9. Combes, Jean-Louis & Lesuisse, Pierre, 2022. "Inflation and unemployment, new insights during the EMU accession," International Economics, Elsevier, vol. 172(C), pages 124-142.
    10. Philipp F. M. Baumann & Enzo Rossi & Alexander Volkmann, 2020. "What Drives Inflation and How: Evidence from Additive Mixed Models Selected by cAIC," Papers 2006.06274, arXiv.org, revised Aug 2022.
    11. Lhuissier, Stéphane & Ortmans, Aymeric & Tripier, Fabien, 2022. "The Risk of Inflation Dispersion in the Euro Area," CEPREMAP Working Papers (Docweb) 2212, CEPREMAP.
    12. Ferrara, Laurent & Mogliani, Matteo & Sahuc, Jean-Guillaume, 2022. "High-frequency monitoring of growth at risk," International Journal of Forecasting, Elsevier, vol. 38(2), pages 582-595.
    13. Drago Bergholt & Francesco Furlanetto & Etienne Vaccaro-Grange, 2023. "Did monetary policy kill the Phillips Curve? Some simple arithmetics," Working Paper 2023/2, Norges Bank.
    14. Adams, Patrick A. & Adrian, Tobias & Boyarchenko, Nina & Giannone, Domenico, 2021. "Forecasting macroeconomic risks," International Journal of Forecasting, Elsevier, vol. 37(3), pages 1173-1191.
    15. Gregor Boehl & Philipp Lieberknecht, 2021. "The Hockey Stick Phillips Curve and the Zero Lower Bound," CRC TR 224 Discussion Paper Series crctr224_2021_266, University of Bonn and University of Mannheim, Germany.
    16. David Kohns & Tibor Szendrei, 2021. "Decoupling Shrinkage and Selection for the Bayesian Quantile Regression," Papers 2107.08498, arXiv.org.
    17. Janice C. Eberly & James H. Stock & Jonathan H. Wright, 2020. "The Federal Reserve's Current Framework for Monetary Policy: A Review and Assessment," International Journal of Central Banking, International Journal of Central Banking, vol. 16(1), pages 5-71, February.
    18. Lasha Arevadze & Tamta Sopromadze & Giorgi Tsutskiridze & Shalva Mkhatrishvili, 2020. "Identifying the Phillips Curve in Georgia," NBG Working Papers 01/2020, National Bank of Georgia.
    19. Alexander Doser & Ricardo Nunes & Nikhil Rao & Viacheslav Sheremirov, 2023. "Inflation expectations and nonlinearities in the Phillips curve," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 38(4), pages 453-471, June.
    20. Franz Xaver Zobl & Martin Ertl, 2021. "The Condemned Live Longer – New Evidence of the New Keynesian Phillips Curve in Central and Eastern Europe," Open Economies Review, Springer, vol. 32(4), pages 671-699, September.

    More about this item

    Keywords

    ;
    ;

    JEL classification:

    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:14074. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://www.cepr.org .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.