Inflation at Risk

David Lopez-Salido and Francesca Loria
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Francesca Loria: https://www.federalreserve.gov/econres/francesca-loria.htm

No 2020-013, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We investigate how macroeconomic drivers affect the predictive inflation distribution as well as the probability that inflation will run above or below certain thresholds over the near term. This is what we refer to as Inflation-at-Risk–a measure of the tail risks to the inflation outlook. We find that the recent muted response of the conditional mean of inflation to economic conditions does not convey an adequate representation of the overall pattern of inflation dynamics. Analyzing data from the 1970s reveals ample variability in the conditional predictive distribution of inflation that remains even when focusing on the post-2000 period of stable and low mean inflation. We also document that in the United States and in the Euro Area tight financial conditions carry substantial downside inflation risks, a feature overlooked by much of the literature. Our paper offers a new empirical perspective to existing macroeconomic models, showing that changes in credit conditions are also key to understand the dynamics of the inflation tails.

Keywords: Quantile regression; inflation risks (search for similar items in EconPapers)
JEL-codes: C21 E31 (search for similar items in EconPapers)
Pages: 65 p.
Date: 2020-02-13
New Economics Papers: this item is included in nep-mac and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2020-13

DOI: 10.17016/FEDS.2020.013

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