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THE SWINGS OF U.S. INFLATION AND THE GIBSON PARADOX
Author(s) -
Casares Miguel,
Vázquez Jesús
Publication year - 2018
Publication title -
economic inquiry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.823
H-Index - 72
eISSN - 1465-7295
pISSN - 0095-2583
DOI - 10.1111/ecin.12523
Subject(s) - economics , phillips curve , new keynesian economics , monetary policy , dynamic stochastic general equilibrium , keynesian economics , interest rate , nominal interest rate , inflation (cosmology) , volatility (finance) , business cycle , econometrics , monetary economics , real interest rate , physics , theoretical physics
In recent business cycles, U.S. inflation has experienced a reduction of volatility and a severe weakening in the correlation to the nominal interest rate (Gibson paradox). We examine these facts in an estimated dynamic stochastic general equilibrium model with money. Our findings point at a flatter New Keynesian Phillips Curve (higher price stickiness) and a lower persistence of markup shocks as the main explanatory factors. In addition, a higher interest‐rate elasticity of money demand, an increasing role of demand‐side shocks, and a less systematic behavior of Fed's monetary policy also account for the recent patterns of U.S. inflation dynamics. ( JEL E32, E47)
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