Inflation Dynamics and the Great Recession

57 Pages Posted: 12 Jun 2011

See all articles by Laurence Ball

Laurence Ball

Johns Hopkins University - Department of Economics; National Bureau of Economic Research (NBER); International Monetary Fund (IMF)

Sandeep Mazumder

Wake Forest University - Department of Economics; Johns Hopkins University - Department of Economics; International Monetary Fund (IMF)

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Date Written: June 2011

Abstract

This paper examines inflation dynamics in the United States since 1960, with a particular focus on the Great Recession. A puzzle emerges when Phillips curves estimated over 1960-2007 are ussed to predice inflation over 2008-2010: inflation should have fallen by more than it did. We resolve this puzzle with two modifications of the Phillips curve, both suggested by theories of costly price adjustment: we measure core inflation with the median CPI inflation rate, and we allow the slope of the Phillips curve to change with the level and vairance of inflation. We then examine the hypothesis of anchored inflation expectations. We find that expectations have been fully "shock-anchored" since the 1980s, while "level anchoring" has been gradual and partial, but significant. It is not clear whether expectations are sufficiently anchored to prevent deflation over the next few years. Finally, we show that the Great Recession provides fresh evidence against the New Keynesian Phillips curve with rational expectations.

Keywords: Consumer price indexes, Deflation, Economic models, Economic recession, Inflation, Inflation rates, Price adjustments, Price increases, Supply, United States

Suggested Citation

Ball, Laurence M. and Mazumder, Sandeep, Inflation Dynamics and the Great Recession (June 2011). IMF Working Paper No. 11/121, Available at SSRN: https://ssrn.com/abstract=1861791

Laurence M. Ball (Contact Author)

Johns Hopkins University - Department of Economics ( email )

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International Monetary Fund (IMF) ( email )

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Sandeep Mazumder

Wake Forest University - Department of Economics ( email )

Winston-Salem, NC 27109
United States

Johns Hopkins University - Department of Economics ( email )

3400 Charles Street
Baltimore, MD 21218-2685
United States

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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