Discussion paper

DP14074 Inflation at Risk

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.


López-Salido, J and F Loria (eds) (2019), “DP14074 Inflation at Risk”, CEPR Press Discussion Paper No. 14074. https://cepr.org/publications/dp14074