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Modeling Inflation After the Crisis

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Listed author(s):
  • James H. Stock
  • Mark W. Watson

Abstract

In the United States, the rate of price inflation falls in recessions. Turning this observation into a useful inflation forecasting equation is difficult because of multiple sources of time variation in the inflation process, including changes in Fed policy and credibility. We propose a tightly parameterized model in which the deviation of inflation from a stochastic trend (which we interpret as long-term expected inflation) reacts stably to a new gap measure, which we call the unemployment recession gap. The short-term response of inflation to an increase in this gap is stable, but the long-term response depends on the resilience, or anchoring, of trend inflation. Dynamic simulations (given the path of unemployment) match the paths of inflation during post-1960 downturns, including the current one.

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File URL: http://www.nber.org/papers/w16488.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16488.

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Date of creation: Oct 2010
Publication status: published as James H. Stock & Mark W. Watson, 2010. "Modeling inflation after the crisis," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 173-220.
Handle: RePEc:nbr:nberwo:16488
Note: EFG ME
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Find related papers by JEL classification:
  • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
  • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. The FOMC is coming
    by Steve Cecchetti and Kim Schoenholtz in Money, Banking and Financial Markets on 2015-09-06 12:04:06
  2. Problems in Forecasting Inflation
    by Mark Thoma in Economist's View on 2015-09-11 00:15:00
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