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The Inflation Rate Disconnect Puzzle: On the International Component of Trend Inflation and the Flattening of the Phillips Curve

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  • Guido Ascari
  • Luca Fosso

Abstract

Since 2000 U.S. inflation has remained both below target and silent to domestic slack and monetary interventions. A trend-cycle BVAR decomposition explores the role of imported intermediate goods in explaining the puzzling behaviour of inflation. The trend analysis shows that, starting from the `90s, despite very well-anchored expectations, slow-moving imported "cost-push" factors induced deflationary pressure keeping trend inflation below target. The cycle block provides evidence in favour of a flattening of the Phillips curve, mainly attributable to a weaker wage pass-through. The business cycle behaviour of inflation is determined by a shock originating abroad, which indeed generates the main bulk of volatility in the international prices of intermediate goods and is poorly connected to the domestic slack.

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  • Guido Ascari & Luca Fosso, 2021. "The Inflation Rate Disconnect Puzzle: On the International Component of Trend Inflation and the Flattening of the Phillips Curve," Working Papers 733, DNB.
    • Handle: RePEc:dnb:dnbwpp:733
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    Cited by:

    1. Richard K. Crump & Stefano Eusepi & Domenico Giannone & Eric Qian & Argia M. Sbordone, 2021. "A Large Bayesian VAR of the United States Economy," Staff Reports 976, Federal Reserve Bank of New York.
    2. Drago Bergholt & Francesco Furlanetto & Etienne Vaccaro-Grange, 2023. "Did monetary policy kill the Phillips Curve? Some simple arithmetics," Working Paper 2023/2, Norges Bank.
    3. Guido Ascari & Paolo Bonomolo & Qazi Haque, 2023. "The Long-Run Phillips Curve is ... a Curve," DEM Working Papers Series 213, University of Pavia, Department of Economics and Management.
    4. Michael Berlemann & Marina Eurich & Erik Haustein, 2022. "Inflation in Deutschland gewinnt an Fahrt [Inflation in Germany gains momentum]," Wirtschaftsdienst, Springer;ZBW - Leibniz Information Centre for Economics, vol. 102(4), pages 319-320, April.
    5. Jean-Paul L'Huillier & Gregory Phelan, 2023. "Can Supply Shocks Be Inflationary with a Flat Phillips Curve?," Working Papers 23-36, Federal Reserve Bank of Cleveland.
    6. Francesco Bianchi & Giovanni Nicolo & Dongho Song, 2023. "Inflation and Real Activity over the Business Cycle," Finance and Economics Discussion Series 2023-038, Board of Governors of the Federal Reserve System (U.S.).
    7. Nataliia Ostapenko, 2022. "Do output gap estimates improve inflation forecasts in Slovakia?," Working and Discussion Papers WP 4/2022, Research Department, National Bank of Slovakia.

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    More about this item

    Keywords

    Trend-Cycle Decomposition; Trend Inflation; Global Inflation; Phillips Curve;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • 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
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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