Resolving the Missing Deflation Puzzle

Jesper Lindé and Mathias Trabandt

No 13690, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We propose a resolution of the missing deflation puzzle. Our resolution stresses the importance of nonlinearities in price- and wage-setting when the economy is exposed to large shocks. We show that a nonlinear macroeconomic model with real rigidities resolves the missing deflation puzzle, while a linearized version of the same underlying nonlinear model fails to do so. In addition, our nonlinear model reproduces the skewness of inflation and other macroeconomic variables observed in post-war U.S. data. All told, our results caution against the common practice of using linearized models to study inflation and output dynamics.

Keywords: Great recession; Inflation dynamics; Liquidity trap; Zero lower bound; Linearized model solution; Nonlinear model solution; Strategic complementarities; Real rigidities (search for similar items in EconPapers)
JEL-codes: E30 E31 E32 E37 E44 E52 (search for similar items in EconPapers)
Date: 2019-04
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Citations: View citations in EconPapers (33)

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Journal Article: Resolving the missing deflation puzzle (2022)
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