DP14074 Inflation at Risk
|Author(s):||J David López-Salido, Francesca Loria|
|Publication Date:||October 2019|
|Keyword(s):||Inflation risk, Quantile regression|
|Programme Areas:||Monetary Economics and Fluctuations|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=14074|
We find that the recent muted response of the conditional mean of inflation to economic conditions does not convey an adequate representation of the overall pattern of inflation dynamics. Analyzing data from the 1970s reveals ample variability in the entire conditional distribution of inflation. Focusing on the period from 2000 onward bolsters this evidence. Using time-series data for the United States and the Euro Area, we document that looking at the entire conditional distribution of inflation uncovers - after controlling for the state of the labor market and inflation expectations - that heightened financial conditions carry substantial and persistent low-inflation risks, a feature overlooked by much of the literature. Our paper offers a new empirical perspective to existing macroeconomic models, showing that changes in credit conditions are also key to understand the dynamics of the inflation tails.