Understanding Post-COVID Inflation Dynamics

Martin Harding, Jesper Lindé and Mathias Trabandt

Staff Working Papers from Bank of Canada

Abstract: We propose a macroeconomic model with a nonlinear Phillips curve that has a flat slope when inflationary pressures are subdued and steepens when inflationary pressures are elevated. The nonlinear Phillips curve in our model arises due to a quasi-kinked demand schedule for goods produced by firms. Our model can jointly account for the modest decline in inflation during the Great Recession and the surge in inflation post-COVID-19. Because our model implies a stronger transmission of shocks when inflation is high, it generates conditional heteroskedasticity in inflation and inflation risk. Hence, our model can generate more sizable inflation surges due to cost-push and demand shocks than a standard linearized model. Finally, our model implies that central banks face a more severe trade-off between inflation and output stabilization when inflation is high.

Keywords: Business fluctuations and cycles; Central bank research; Coronavirus disease (COVID-19); Economic models; Inflation and prices; Inflation: costs and benefits; Monetary policy; Monetary policy implementation (search for similar items in EconPapers)
JEL-codes: E37 E44 E52 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2022-12
New Economics Papers: this item is included in nep-ban, nep-cba and nep-mon
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Related works:
Journal Article: Understanding post-COVID inflation dynamics (2023)
Working Paper: Understanding post-Covid inflation dynamics (2023)
Working Paper: Understanding Post-COVID Inflation Dynamics (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:22-50

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