Working Paper: CEPR ID: DP10306
Authors: Chiara Fratto; Harald Uhlig
Abstract: Why was there no deflation and what accounts for inflation after 2008? We use the prominent pre-crisis Smets-Wouters (2007) model to address this question. We find that due to price markup shocks alone inflation would have been 1%higher than observed and 0.5% higher that the long-run average. Their standard deviation is similar to its pre-crisis level. Price markup shocks were also responsible for the slow recovery of employment, though not for the initial drop. Monetary policy shocks predict an inflation rate 0.5% below average. Government expenditure innovations do not contribute much either to inflation or to employment dynamics
Keywords: Inflation; Employment; Financial Crisis; Macroeconomic Modeling
JEL Codes: E31; E32; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| price markup shocks (D49) | inflation (E31) |
| monetary policy shocks (E39) | inflation (E31) |
| risk premium shocks (G19) | employment (J68) |
| monetary policy shocks (E39) | employment (J68) |
| price markup shocks (D49) | employment (J68) |
| government expenditure shocks (H59) | inflation (E31) |
| government expenditure shocks (H59) | employment (J68) |