Inflation Dynamics and the Great Recession

Sandeep Mazumder and Laurence Ball

No 2011/121, IMF Working Papers from International Monetary Fund

Abstract: This paper examines inflation dynamics in the United States since 1960, with a particular focus on the Great Recession. A puzzle emerges when Phillips curves estimated over 1960-2007 are ussed to predice inflation over 2008-2010: inflation should have fallen by more than it did. We resolve this puzzle with two modifications of the Phillips curve, both suggested by theories of costly price adjustment: we measure core inflation with the median CPI inflation rate, and we allow the slope of the Phillips curve to change with the level and vairance of inflation. We then examine the hypothesis of anchored inflation expectations. We find that expectations have been fully "shock-anchored" since the 1980s, while "level anchoring" has been gradual and partial, but significant. It is not clear whether expectations are sufficiently anchored to prevent deflation over the next few years. Finally, we show that the Great Recession provides fresh evidence against the New Keynesian Phillips curve with rational expectations.

Keywords: WP; Phillips curve; core CPI; XFE inflation; Inflation; Great Recession; inflation behavior; forecasted inflation; inflation expectation; median inflation; Unemployment; Supply shocks; Output gap; Labor share (search for similar items in EconPapers)
Pages: 56
Date: 2011-06-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (298)

Downloads: (external link)
http://www.imf.org/external/pubs/cat/longres.aspx?sk=24891 (application/pdf)

Related works:
Journal Article: Inflation Dynamics and the Great Recession (2011)
Working Paper: Inflation Dynamics and the Great Recession (2011)
Working Paper: Inflation Dynamics and the Great Recession (2011)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:imf:imfwpa:2011/121

Ordering information: This working paper can be ordered from
http://www.imf.org/external/pubs/pubs/ord_info.htm

Access Statistics for this paper

More papers in IMF Working Papers from International Monetary Fund International Monetary Fund, Washington, DC USA. Contact information at EDIRC.
Bibliographic data for series maintained by Akshay Modi ().