Accounting for inflation dynamic in a fully optimizing macroeconomic framework: evidence from the US states

Salaheddine El Omari and Noureddine Benlagha

Applied Economics, 2024, vol. 56, issue 5, 582-598

Abstract: This article proposes a New Keynesian DSGE model that can capture the hump-shaped response of inflation to a monetary policy shock that does not depend upon backward-looking elements for the price and wage-setting, such as the indexation of wages or prices. The two additional elements required to achieve a hump-shaped response are roundabout production structure (input–output structure for production) and working capital. Depending on the model’s parameterization, this channel can provide a pronounced response of inflation. In addition, our article provides some reduced-form evidence about the hump-shaped response of inflation using a VAR with Cholesky ordering.

Date: 2024
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DOI: 10.1080/00036846.2023.2169240

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