Inflation Dynamics and the Great Recession

By Laurence Ball, Sandeep Mazumder. Social Science Research Network, 2011

410 citations recorded by the source corpus.

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 used to predict inflation over 2008–10: 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 weighted median of consumer price inflation rates across industries, and we allow the slope of the Phillips curve to change with the level and variance 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.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/fbdabd74ef7c76f1eec755a2a41bf3a71f90150a

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Citations in the corpus

Is The Phillips Curve Alive and Well After All? Inflation Expectations and the Missing Disinflation (2013, background): “For now, we follow Ball and Mazumder (2011) and assume as a simple baseline that expectations of future inflation are backward-looking and can be approximated by the average of the previous four quarters’ inflation rates: .”
Slack and Cyclically Sensitive Inflation (2019, neutral): “Papers on the apparent flattening of the Phillips curve in the 2000s, and especially since the financial crisis recession includes (among others) Stock and Watson (2010), Ball and Mazumder (2011, 2014), Stock (2011), Gordon (2013), Watson (2014), Kiley (2015), Blanchard (2016), and Bell and Blanchfl”
Understanding Inflation as a Joint Monetary-Fiscal Phenomenon (2016, background): “Even as Prime Minister Abe appeared to announce an end to the inconsistency and Japanese economic activity and inflation were showing signs of life, Japan raised the (55)For example, Hall (2011) and Ball and Mazumder (2011). (56)Imakubo, Kojima, and Nakajima (2015) calculate that real yields on zero”
What's Up with the Phillips Curve? (2020, neutral): “…Recession, when unemployment was close to 10 percent but inflation barely dipped below 1 percent, leading many economists to debate about a “missing deflation” puzzle (e.g. Hall, 2011, Ball and Mazumder, 2011, Coibion and Gorodnichenko, 2015, Del Negro et al., 2015b, Lindevand Trabandt, 2019).”
Are the Long-Term Unemployed on the Margins of the Labor Market? (2014, background): “Several economists have provided possible explanations for the missed predictions of the Phillips curve, based on anchoring of inflation expectations (Bernanke 2007 and 2010) or changes in the distribution of price increases and interactions in the Phillips curve (Ball and Mazumder 2011).”
Inflation Dynamics During the Financial Crisis (2015, neutral): “Among the most prominent explanations for the missing-deflation puzzle are the “anchored expectations” hypothesis and explanations emphasizing alternative measures of economic slack (Ball and Mazumder, 2011; Gordon, 2013; Krueger et al., 2014).4 Although this work provides considerable support for t”
Optimal Inflation and the Identification of the Phillips Curve (2019, background): “In an influential contribution, Ball and Mazumder (2011) estimate a time-varying Phillips curve using median inflation as a measure of core inflation.”