Working Paper: NBER ID: w19598
Authors: Olivier Coibion; Yuriy Gorodnichenko
Abstract: We evaluate possible explanations for the absence of a persistent decline in inflation during the Great Recession and find commonly suggested explanations to be insufficient. We propose a new explanation for this puzzle within the context of a standard Phillips curve. If firms' inflation expectations track those of households, then the missing disinflation can be explained by the rise in their inflation expectations between 2009 and 2011. We present new econometric and survey evidence consistent with firms having similar expectations as households. The rise in household inflation expectations from 2009 to 2011 can be explained by the increase in oil prices over this time period.
Keywords: Phillips Curve; Inflation Expectations; Disinflation; Great Recession
JEL Codes: E3; E5
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increase in oil prices (Q31) | Heightened household inflation expectations (D19) |
| Heightened household inflation expectations (D19) | Firm pricing decisions (L11) |
| Increase in oil prices (Q31) | Firm pricing decisions (L11) |