Understanding post-Covid inflation dynamics

Martin Harding, Jesper Lindé and Mathias Trabandt

No 1077, BIS Working Papers from Bank for International Settlements

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 during the Post-COVID period. 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 sizeable inflation surges due to cost-push and demand shocks than a standard linearized model. Finally, our model implies that the central bank faces a more severe trade-off between inflation and output stabilization when inflation is high.

Keywords: inflation dynamics; inflation risk; monetary policy; linearized model; nonlinear model; real rigidities. (search for similar items in EconPapers)
JEL-codes: E30 E31 E32 E37 E44 E52 (search for similar items in EconPapers)
Date: 2023-02
New Economics Papers: this item is included in nep-ban, nep-cba and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (33)

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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 (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:bis:biswps:1077

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