Working Paper: CEPR ID: DP14583
Authors: Marco Del Negro; Michele Lenza; Giorgio E. Primiceri; Andrea Tambalotti
Abstract: The business cycle is alive and well, and real variables respond to it more or less as they always did. Witness the Great Recession. Inflation, in contrast, has gone quiescent. This paper studies the sources of this disconnect using VARs and an estimated DSGE model. It finds that the disconnect is due primarily to the muted reaction of inflation to cost pressures, regardless of how they are measured—a flat aggregate supply curve. A shift in policy towards more forceful inflation stabilization also appears to have played some role by reducing the impact of demand shocks on the real economy. The evidence rules out stories centered around changes in the structure of the labor market or in how we should measure its tightness.
Keywords: inflation; unemployment; monetary policy; tradeoff; VAR; DSGE models
JEL Codes: E31; E32; E37; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| monetary policy responses (E52) | inflation stability (E31) |
| labor market dynamics (J29) | inflation stability (E31) |
| inflation (E31) | economic fluctuations (E32) |
| inflation (E31) | unemployment shocks (J64) |
| Excess Bond Premium (EBP) (G12) | demand shocks (E39) |
| demand shocks (E39) | inflation (E31) |