A link to the paper @ nber www.nber.org/papers/w32322
A link to the paper @ cepr t.co/0kQjKNktdy
Lesson for monetary policy: raising interest rates to reduce labour market tightness is ineffective. One would have needed to curb down inflation expectations. Communication may be key (nothing in the paper on this). Thanks for your time. 9/9
With a bit of deviation from full knowledge of the true model of the economy, this generates persistent quasi self-fulfilling inflation episodes. A full model is estimated and shows the dominant role of broad-based supply shock in the recent period. 8/9
Confronted with an increase in many prices, agents put more weight on inflation being high, and revise accordingly their expectations Expectations then feed back into actual inflation. 7/9
Here is our conjecture: agents form expectations by trying to extract a common component from disaggregated price data. Let’s assume that there are broad-based supply shocks increasing many (but not all) prices. 6/9
We then show that given flatness and non persistent supply shocks, a Rat. Exp. model of the Phillips Curve cannot account for the recent inflationary episode. So it seems we need to rethink our modelling of inflation expectations. 5/9
(c) Inflation expectations (one-year ahead), as measured from the Michigan Survey of Consumers, are persistent and account for most of the recent inflation episode. We confirm these results using some less structural VAR analysis. 4/9
(b) supply shocks (the residuals from the PC) are almost iid: they cannot account for the persistence of inflation and inflation expectations. (hence the team transitory view) 3/9