Resolving the Missing Deflation Puzzle
Journal of Monetary Economics,
A resolution of the missing deflation puzzle is proposed. Our resolution stresses the importance of nonlinearities in price- and wage-setting when the economy is exposed to large shocks. We show that a nonlinear macroeconomic model with real rigidities resolves the missing deflation puzzle, while a linearized version of the same underlying nonlinear model fails to do so. In addition, our nonlinear model reproduces the skewness of inflation and other macroeconomic variables observed in post-war U.S. data. All told, our results caution against the common practice of using linearized models to study inflation and output dynamics.
Inflation Dynamics During the Financial Crisis in Europe: Cross-sectional Identification of Long-run Inflation Expectations
We investigate drivers of Euro area inflation dynamics using a panel of regional Phillips curves and identify long-run inflation expectations by exploiting the crosssectional dimension of the data. Our approach simultaneously allows for the inclusion of country-specific inflation and unemployment-gaps, as well as time-varying parameters. Our preferred panel specification outperforms various aggregate, uni- and multivariate unobserved component models in terms of forecast accuracy. We find that declining long-run trend inflation expectations and rising inflation persistence indicate an altered risk of inflation expectations de-anchoring. Lower trend inflation, and persistently negative unemployment-gaps, a slightly increasing Phillips curve slope and the downward pressure of low oil prices mainly explain the low inflation rate during the recent years.
Evaluating the German (New Keynesian) Phillips Curve
This paper evaluates the New Keynesian Phillips Curve (NKPC) and its hybrid
variant within a limited information framework for Germany. The main interest rests on the average frequency of price re-optimization of ﬁrms. We use the labor income share as the driving variable and consider a source of real rigidity by allowing for a ﬁxed ﬁrm-speciﬁc capital stock. A GMM estimation strategy is employed as well as an identiﬁcation robust method that is based upon the Anderson-Rubin statistic. We ﬁnd out that the German Phillips Curve is purely forward looking. Moreover, our point estimates are consistent with the view that ﬁrms re-optimize prices every two to three quarters. While these estimates seem plausible from an economic point of view, the uncertainties around these estimates are very large and also consistent with perfect nominal price rigidity where ﬁrms never re-optimize prices. This analysis also oﬀers some explanations why previous results for the German NKPC based on GMM diﬀer considerably. First, standard GMM results are very sensitive to the way how orthogonality conditions are formulated. Additionally, model misspeciﬁcations may be left undetected by conventional J tests. Taken together, this analysis points out
the need for identiﬁcation robust methods to get reliable estimates for the NKPC.