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Understanding the Return of Inflation

Paper Session

Saturday, Jan. 6, 2024 8:00 AM - 10:00 AM (CST)

Grand Hyatt, Texas Ballroom Salon F
Hosted By: American Economic Association
  • Chair: Stephanie Schmitt-Grohé, Columbia University

Some International Evidence on Non-Linear Phillips Curves

Gauti B. Eggertsson
,
Brown University
Pierpaolo Benigno
,
University of Bern

Abstract

We provide international evidence that conditions of very tight labor market, identified by a high ratio of job vacancies to unemployed workers, are associated with a steep slope in the relationship between inflation and the economic slack. Under these conditions, inflation is more reactive to both demand and supply shocks. On the contrary, when the labor market is loose, the Phillips curve is flatter and inflation is more sluggish in its adjustment. We document that episodes of very tight labor market are rare and associated with period of exceptional expansions in monetary and fiscal policies. We futher document that conditional on this episodes the Beveridge curve does not imply a high sacrifice ratio in terms of unemployment to bring down inflation.

Origins of U.S. Inflation Since 1950

Christopher A. Sims
,
Princeton University

Abstract

Since 1950 the US has had three bouts of high inflation — in the 1950’s, in the 1970’s and in the last few years. The latter two were each preceded by fiscal expansions that, if normalized by outstanding debt, were higher that at any other time since 1950. This paper brings together four federal government fiscal time series — the primary surplus, expenditures net of interest, net interest expenditures, and government debt — together with a measure of financial stress, real gdp, the gdp deflator, and the federal reserve discount rate. These 8 variables are modeled as generated by a structural VAR, with 8 mutually orthogonal disturbances whose relative variances vary over time. The model generates estimated responses to these shocks, and the paper interprets them through the lens of the fiscal theory of the price level. The results suggest that focusing narrowly on monetary policy in trying to understand the origins of inflation is a mistake.

The NY Fed DGSE model: A Post COVID Assessment of its Performance

Marco Del Negro
,
Federal Reserve Bank of New York

Abstract

The paper documents the forecasting performance of the NY Fed DGSE model over the past decade and discusses how the model interprets developments in the US economy in the post-COVID years, specifically inflation and the effects of the related policy tightening.

What Do Long Data Tell Us About the Inflation Hike Post COVID-19 Pandemic?

Martin Uribe
,
Columbia University
Stephanie Schmitt-Grohé
,
Columbia University

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 55 basis points. If instead we estimate the model using postwar data (1955–2021), the permanent component of inflation is predicted to have increased by 237 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 1970s 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.

Discussant(s)
Jón Steinsson
,
University of California-Berkeley
John Cochrane
,
Hoover Institution
Karel Mertens
,
Federal Reserve Bank of Dallas
Francesco Bianchi
,
Johns Hopkins University
JEL Classifications
  • E3 - Prices, Business Fluctuations, and Cycles