Understanding Post-COVID Inflation Dynamics

By Martin Harding, Jesper Lindé, Mathias Trabandt

January 20, 2023

Preview Citation

Format: Chicago

Martin Harding, Jesper Lindé, and Mathias Trabandt. Understanding Post-COVID Inflation Dynamics, (USA: International Monetary Fund, 2023) accessed December 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

We propose a macroeconomic model with a nonlinear Phillips curve that has a flat slope when inflationary pressures are subdued and steepens when inflationary pressures are elevated. The nonlinear Phillips curve in our model arises due to a quasi-kinked demand schedule for goods produced by firms. Our model can jointly account for the modest decline in inflation during the Great Recession and the surge in inflation during the Post-Covid period. Because our model implies a stronger transmission of shocks when inflation is high, it generates conditional heteroskedasticity in inflation and inflation risk. Hence, our model can generate more sizeable inflation surges due to cost-push and demand shocks than a standard linearized model. Finally, our model implies that the central bank faces a more severe trade-off between inflation and output stabilization when inflation is high.

Subject: Central bank policy rate, Demand elasticity, Economic theory, Financial services, Inflation, Interest rate floor, Monetary policy, Output gap, Prices, Production

Keywords: Central bank policy rate, Cost-push shock, Demand elasticity, Global, Inflation, Inflation dynamics, Inflation risk, Inflation-output gap trade-off, Interest rate floor, Linearized model, Monetary policy, Nonlinear model, Nonlinear Phillips curve, Output gap, Real rigidities

Publication Details

Pages:

42
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2023/010
Stock No:

WPIEA2023010
ISBN:

9798400231162
ISSN:

1018-5941

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