Inflation
Paper Session
Saturday, Jan. 4, 2025 8:00 AM - 10:00 AM (PST)
- Chair: Jean-Paul L'Huillier, Brandeis University
Can Supply Shocks Be Inflationary with a Flat Phillips Curve?
Abstract
Not in standard models. With conventional pricing frictions, imposing a flat Phillips curve also imposes a price level that is rigid with respect to supply shocks. In the New Keynesian model, price markup shocks need to be several orders of magnitude bigger than other shocks in order to fit the data, leading to unreasonable assessments of the magnitude of the increase in costs during inflationary episodes. To account for the facts, we propose a strategic microfoundation of shock-dependent price stickiness: prices are sticky with respect to demand shocks but flexible with respect to supply shocks. This friction is demand-intrinsic, in line with narrative accounts for the imperfect adjustment of prices. Firms can credibly justify a price increase due to a rise in costs, whereas it is harder to do so when demand increases. Supply shocks, including productivity shocks, lead to a flexible-price allocation, where inflation rises rapidly and output falls. An output gap ensues only if monetary policy is tightened.Trade Costs and Inflation Dynamics
Abstract
We explore how shocks to trade costs affect inflation dynamics in a global economy. We identifytrade costs by exploiting bilateral trade flows for final and intermediate goods and the structure of
static trade models that deliver structural gravity equations. We then use a local projections approach
to assess the effects of estimated trade cost shocks on countries’ consumer price (CPI) inflation and
other macroeconomic variables. Higher trade costs lead to increases in inflation and dampen economic
activity. We propose a multi-country New-Keynesian model featuring international trade in final and
intermediate goods that can replicate the macroeconomic responses we identify in the data. We show
that a global increase in trade costs can lead to a global surge in inflation. We also show that the degree
of trade integration and the elasticity of substitution between production inputs play an important role
in shaping the response of inflation to trade cost shocks. We use the model to explore counterfactual
paths of U.S. inflation in the aftermath of the COVID-19 pandemic.
Discussant(s)
Callum Jones
,
Federal Reserve Board
Matteo Cacciatore
,
HEC Montreal
Oleksiy Kryvtsov
,
Bank of Canada
JEL Classifications
- E3 - Prices, Business Fluctuations, and Cycles
- E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit