The Review of Economics and Statistics Vol. 104 No. 4 2022

A Model of the Fed's View on Inflation

Thomas Hasenzagl¹; Filippo Pellegrino²; Lucrezia Reichlin³; G. Ricco⁴

¹ University of Minnesota · ² London School of Economics and Political Science · ³ London Business School, Now-Casting Economics, and CEPR · ⁴ University of Warwick, OFCE-SciencesPo, and CEPR

Abstract

We develop a medium-size semistructural time series model of inflation dynamics that is consistent with the view, often expressed by central banks, that three components are important: a trend anchored by long-run expectations, a Phillips curve, and temporary fluctuations in energy prices. We find that a stable long-term inflation trend and a well-identified steep Phillips curve are consistent with the data, but they imply potential output declining since the new millennium and energy prices affecting headline inflation not only via the Phillips curve but also via an independent expectational channel.

DOI

10.1162/rest_a_00974

Volume

104

Issue

4

Pages

686-704

Language

en

Sources

openalex crossref