Working Paper: NBER ID: w30357
Authors: Stephanie Schmitt-Grohe; MartÃn Uribe
Abstract: To what extent is the recent spike in inflation driven by a change in its permanent component? We estimate a semi-structural model of output, inflation, and the nominal interest rate in the United States over the period 1900-2021. The model predicts that between 2019 and 2021 the permanent component of inflation rose by 51 basis points. If instead we estimate the model using postwar data (1955--2021), the permanent component of inflation is predicted to have increased by 238 basis points. A possible interpretation of this finding is that the model estimated on the shorter sample assigns a larger increase in the permanent component of inflation because the period 1955-2021 does not contain sudden sparks in inflation like the one observed in the aftermath of the COVID-19 pandemic but only gradual ones---the great inflation of the 70s took more than 10 years to build up. By contrast, the period 1900-1954 is plagued with sudden inflation hikes---including one around the 1918 Spanish flu pandemic---which the estimated model endogenously recalls and uses to interpret inflation around the COVID-19 episode. This result suggests that prewar data might be of use to understand recent inflation dynamics.
Keywords: inflation; COVID-19; permanent component; semistructural model; historical data
JEL Codes: E31; E37; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Permanent component of inflation (E31) | Increase in inflation (2019-2021) (E31) |
| COVID-19 pandemic (H12) | Spike in inflation (E31) |
| Data context (prewar vs postwar) (N44) | Interpretation of inflation dynamics (E31) |
| Historical context of inflation data (E31) | Identification strategy (C26) |