Missing Disinflation and Missing Inflation: The Puzzles that Aren't

40 Pages Posted: 3 Feb 2017  

Elena Bobeica

European Central Bank (ECB)

Marek Jarocinski

European Central Bank (ECB)

Date Written: January 25, 2017

Abstract

In the immediate wake of the Great Recession we didn't see the disinflation that most models predicted and, subsequently, we didn't see the inflation they predicted. We show that these puzzles disappear in a Vector Autoregressive model that properly accounts for domestic and global factors. Such a model reveals, among others, that domestic factors explain much of the inflation dynamics in the 2012-2014 euro area missing inflation episode. Consequently, economists and models that excessively focused on the global nature of inflation were liable to miss the contribution of deflationary domestic shocks during this episode.

Keywords: Inflation Dynamics, International Transmission of Shocks, Phillips curve, Bayesian Vector Autoregression, Conditional Forecast, Shock Identification

JEL Classification: E31, E32, F44

Suggested Citation

Bobeica, Elena and Jarocinski, Marek, Missing Disinflation and Missing Inflation: The Puzzles that Aren't (January 25, 2017). ECB Working Paper No. 2000. Available at SSRN: https://ssrn.com/abstract=2910914

Elena Bobeica (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Marek Jarocinski

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
+49 69 1344 6414 (Phone)

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