A Model of the Fed’s View on Inflation
Accepted at the Review of Economics and Statistics
Slides ECB-Cleveland Inflation Conference (May 2020) [PDF]
Replica Code [GitHub]
Output gap and other structural components as estimated by the mode (CSV)
A view often expressed by central banks is that three components matter for inflation dynamics: a trend anchored by long-run expectations, a cycle connecting nominal and real variables, and energy prices. This paper proposes a novel semi-structural econometric model informed by this understanding of inflation, incorporating key economic relations such as the Phillips curve and Okun's Law, and supported by inflation expectation data. We identify a stable expectational trend, a steep and well identified Phillips curve and a sizeable energy price component. The latter often overpowers the Phillips curve and explains the inflation puzzles of the last ten years.