Resolving the missing deflation puzzle

Martin Harding, Jesper Lindé and Mathias Trabandt

Journal of Monetary Economics, 2022, vol. 126, issue C, 15-34

Abstract: A resolution of the missing deflation puzzle is proposed. Our resolution stresses the importance of nonlinearities in price- and wage-setting when the economy is exposed to large shocks. We show that a nonlinear macroeconomic model with real rigidities resolves the missing deflation puzzle, while a linearized version of the same underlying nonlinear model fails to do so. In addition, our nonlinear model reproduces the skewness of inflation and other macroeconomic variables observed in post-war U.S. data. All told, our results caution against the common practice of using linearized models to study inflation and output dynamics.

Keywords: Great recession; Inflation dynamics; Monetary policy; Zero lower bound; Nonlinear model solution (search for similar items in EconPapers)
JEL-codes: E30 E31 E32 E37 E44 E52 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (27)

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Working Paper: Resolving the Missing Deflation Puzzle (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:126:y:2022:i:c:p:15-34

DOI: 10.1016/j.jmoneco.2021.09.003

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