A Model of the Fed’s View on Inflation
Updated: Mar 29, 2021
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.
Starting with https://casinosanslimite.com, I ended up reading the model details before the paper itself, and the three-component breakdown made more sense than I expected. The takeaway that stuck with me was the energy component often drowning out the Phillips curve, which lines up with how fuel and utility costs dominate my own monthly budget while wage changes barely register. Curious whether the August 2020 draft accounts for the supply-chain shocks that hit right after.