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A model of FED'S view on inflation

Thomas Hasenzagl, Filippo Pellegrino, Lucrezia Reichlin () and Giovanni Ricco ()
Additional contact information
Thomas Hasenzagl: Now-casting Economics
Filippo Pellegrino: London School of Economics & Now-Casting Economics

No 2018-03, Documents de Travail de l'OFCE from Observatoire Francais des Conjonctures Economiques (OFCE)

Abstract: A view often expressed by the Fed is that three components matter in inflation dynamics: a trend anchored by long run inflation expectations; a cycle connecting nominal and real variables; and oil prices. This paper proposes an econometric structural model of inflation formalising this view. Our findings point to a stable expectational trend, a sizeable and well identified Phillips curve and an oil cycle which, contrary to the standard rational expectation model, affects inflation via expectations without being reflected in the output gap. The latter often overpowers the Phillips curve. In fact, the joint dynamics of the Phillips curve cycle and the oil cycles explain the inflation puzzles of the last ten years.

Keywords: Philipps curve; output gap; unobserved components; Bayesian estimation (search for similar items in EconPapers)
JEL-codes: C11 C32 C53 E31 E32 E52 (search for similar items in EconPapers)
Date: 2018-01-16
New Economics Papers: this item is included in nep-mac
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http://www.ofce.sciences-po.fr/pdf/dtravail/WP2018-03.pdf (application/pdf)

Related works:
Working Paper: A Model of the Fed's View on Inflation (2020) Downloads
Working Paper: A Model of the Fed's View on Inflation (2018) Downloads
Working Paper: A model of the FED's view on inflation (2018) Downloads
Working Paper: A Model of the Fed’s View on Inflation (2017) Downloads
Working Paper: A Model of the Fed’s View on Inflation (2017) Downloads
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