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A model of the FED's view on inflation



Type:   Working paper
Titre:   A model of the FED's view on inflation
Auteur(s):   Hasenzagl, Thomas (Auteur)
Pellegrino, Fillipo - London School of Economics and Political Science (LSE) (Auteur)
Reichlin, Lucrezia - London Business School (LBS) (Auteur)
Ricco, Giovanni - Observatoire français des conjonctures économiques (Auteur)
Date de publication:   2018-01
Collection:   OFCE Working Paper  :  03
Mots-clés:   [en] Phillips curve, Output gap, Unobserved Components, Bayesian estimation
JEL:   C11,  C32,  C53,  E31,  E32,  E52
Résumé:   [en] view often expressed by the Fed is that three components matter in inflation dynamics: a trend anchored by long run inflation expectations; a cycle connecting nominal and real variables; and oil prices. This paper proposes an econometric structural model of inflation formalising this view. Our findings point to a stable expectational trend, a sizeable and well identified Phillips curve and an oil cycle which, contrary to the standard rational expectation model, affects inflation via expectations without being reflected in the output gap. The latter often overpowers the Phillips curve. In fact, the joint dynamics of the Phillips curve cycle and the oil cycles explain the inflation puzzles of the last ten years.


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