Working Paper: NBER ID: w31075
Authors: Francesco Bianchi; Giovanni Nicol; Dongho Song
Abstract: We study the relation between inflation and real activity over the business cycle. We employ a Trend-Cycle VAR model to control for low-frequency movements in inflation, unemployment, and growth that are pervasive in the post-WWII period. We show that cyclical fluctuations of inflation are related to cyclical movements in real activity and unemployment, in line with what is implied by the New Keynesian framework. We then discuss the reasons for which our results relying on a Trend-Cycle VAR differ from the findings of previous studies based on VAR analysis. We explain empirically and theoretically how to reconcile these differences.
Keywords: Inflation; Real Activity; Business Cycle
JEL Codes: C32; E31; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| cyclical fluctuations in inflation (E31) | real per capita GDP (P24) |
| cyclical fluctuations in inflation (E31) | unemployment rate (J64) |
| unemployment-identified shock (J64) | unemployment cycle (J64) |
| unemployment-identified shock (J64) | inflation cycle (E31) |
| unemployment-identified shock (J64) | inflation expectations cycle (E31) |
| unemployment-identified shock (J64) | business cycle volatility of realized inflation (E32) |
| unemployment-identified shock (J64) | business cycle volatility of inflation expectations (E32) |