Financial shocks and inflation dynamics

Angela Abbate (), Sandra Eickmeier and Esteban Prieto ()

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

Abstract: We assess the effects of financial shocks on inflation, and to what extent financial shocks can account for the "missing disinflation" during the Great Recession. We apply a vector autoregressive model to US data and identify financial shocks through sign restrictions. Our main finding is that expansionary financial shocks temporarily lower inflation. This result withstands a large battery of robustness checks. Moreover, negative financial shocks helped preventing a deflation during the crisis. We then explore the transmission channels of financial shocks relevant for inflation, and find that the cost channel explains the inflation response. A policy implication is that financial shocks that move output and inflation in opposite directions may worsen the trade-off for a central bank with a dual mandate.

Keywords: Financial shocks; inflation dynamics; monetary policy; financial frictions; cost channel; sign restrictions (search for similar items in EconPapers)
JEL-codes: E31 E44 E58 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2016-09
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Citations: View citations in EconPapers (32)

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Related works:
Working Paper: Financial shocks and inflation dynamics (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2016-53

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