The hard road to a soft landing: Evidence from a (modestly) nonlinear structural model

Randal Verbrugge and Saeed Zaman

Energy Economics, 2023, vol. 123, issue C

Abstract: What drove inflation so high in 2022? Can it drop rapidly without a recession? The Phillips curve is central to the answers; its proper (nonlinear) specification reveals that the relationship is strong and frequency-dependent, and inflation is very persistent. We embed this empirically-successful Phillips curve – incorporating a supply-shocks variable – into a structural model. Identification is achieved using an underutilized data-dependent method. Despite imposing anchored inflation expectations and a rapid relaxation of supply-chain problems, we find that absent a recession, inflation will be >3% by the end of 2025. A simple welfare analysis supports a mild recession as preferred to an extended period of elevated inflation, under a typical loss function.

Keywords: Nonlinear Phillips curve; Frequency decomposition; Supply price pressures; Structural VAR; Nonlinear impulse response functions; Welfare analysis (search for similar items in EconPapers)
JEL-codes: C32 E31 E32 E52 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Working Paper: The Hard Road to a Soft Landing: Evidence from a (Modestly) Nonlinear Structural Model (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:123:y:2023:i:c:s0140988323002311

DOI: 10.1016/j.eneco.2023.106733

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