The Hard Road to a Soft Landing: Evidence from a (Modestly) Nonlinear Structural Model

Randal Verbrugge and Saeed Zaman

No 23-03, Working Papers from Federal Reserve Bank of Cleveland

Abstract: What drove inflation so high in 2022? Can it drop rapidly without a recession? The Phillips curve is central to the answers; its proper (nonlinear) specification reveals that the relationship is strong and frequency dependent, and inflation is very persistent. We embed this empirically successful Phillips curve – incorporating a supply-shocks variable – into a structural model. Identification is achieved using an underutilized data-dependent method. Despite imposing anchored inflation expectations and a rapid relaxation of supply-chain problems, we find that absent a recession, inflation will be more than 3 percent by the end of 2025. A simple welfare analysis supports a mild recession as preferred to an extended period of elevated inflation, under a typical loss function.

Keywords: Nonlinear Phillips Curve; Frequency Decomposition; Supply Price Pressures; Structural VAR; Nonlinear Impulse Response Functions; Welfare Analysis (search for similar items in EconPapers)
JEL-codes: C32 C36 E31 E32 E52 (search for similar items in EconPapers)
Pages: 50
Date: 2023-01-09
New Economics Papers: this item is included in nep-cba
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Citations: View citations in EconPapers (2)

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Journal Article: The hard road to a soft landing: Evidence from a (modestly) nonlinear structural model (2023)
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DOI: 10.26509/frbc-wp-202303

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