Discussion Paper Details

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Title: A Model of the Fed's View on Inflation

Author(s): Thomas Hasenzagl, Filippo Pellegrino, Lucrezia Reichlin and Giovanni Ricco

Publication Date: January 2018

Keyword(s): Expectations, inflation, oil prices and Phillips curve

Programme Area(s): Monetary Economics and Fluctuations

Abstract: A 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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Bibliographic Reference

Hasenzagl, T, Pellegrino, F, Reichlin, L and Ricco, G. 2018. 'A Model of the Fed's View on Inflation'. London, Centre for Economic Policy Research.