Resolving the Missing Deflation Puzzle
Jesper Lindé and
Mathias Trabandt ()
No 13690, CEPR Discussion Papers from C.E.P.R. Discussion Papers
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; linearized model solution; liquidity trap; nonlinear model solution; Real rigidities; strategic complementarities; zero lower bound (search for similar items in EconPapers)
JEL-codes: E30 E31 E32 E37 E44 E52 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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