Modeling inflation after the crisis
By: James H. Stock, Mark W. Watson
Contributors: Watson, Mark W.; National Bureau of Economic Research
Series: NBER working paper series -- working paper 16488; Working paper series (National Bureau of Economic Research : Online) -- working paper no. 16488.
Publisher: National Bureau of Economic Research
Published: 2010
Place of publication: Cambridge, MA
Language: eng
Format: [electronic resource] /
Description: "In the United States, the rate of price inflation falls in recessions.  Turning this observation into a useful inflation forecasting equation is difficult because of multiple sources of time variation in the inflation process, including changes in Fed policy and credibility.  We propose a tightly parameterized model in which the deviation of inflation from a stochastic trend (which we interpret as long-term expected inflation) reacts stably to a new gap measure, which we call the unemployment recession gap.  The short-term response of inflation to an increase in this gap is stable, but the long-term response depends on the resilience, or anchoring, of trend inflation.  Dynamic simulations (given the path of unemployment) match the paths of inflation during post-1960 downturns, including the current one"--National Bureau of Economic Research web site.
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