Inflation at Risk

65 Pages Posted: 14 May 2020

See all articles by David Lopez-Salido

David Lopez-Salido

Board of Governors of the Federal Reserve System

Francesca Loria

Board of Governors of the Federal Reserve System; European University Institute

Date Written: February 13, 2020

Abstract

We investigate how macroeconomic drivers affect the predictive inflation distribution as well as the probability that inflation will run above or below certain thresholds over the near term. This is what we refer to as Inflation-at-Risk–a measure of the tail risks to the inflation outlook. We find that the recent muted response of the conditional mean of inflation to economic conditions does not convey an adequate representation of the overall pattern of inflation dynamics. Analyzing data from the 1970s reveals ample variability in the conditional predictive distribution of inflation that remains even when focusing on the post-2000 period of stable and low mean inflation. We also document that in the United States and in the Euro Area tight financial conditions carry substantial downside inflation risks, a feature overlooked by much of the literature. Our paper offers a new empirical perspective to existing macroeconomic models, showing that changes in credit conditions are also key to understand the dynamics of the inflation tails.

Keywords: Quantile regression; Inflation risks

JEL Classification: C21; E31

Suggested Citation

Lopez-Salido, David and Loria, Francesca, Inflation at Risk (February 13, 2020). FEDS Working Paper No. 2020-013 https://doi.org/10.17016/FEDS.2020.013 , Available at SSRN: https://ssrn.com/abstract=3600420

David Lopez-Salido (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Francesca Loria

Board of Governors of the Federal Reserve System

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

European University Institute ( email )

Villa Schifanoia
133 via Bocaccio
Firenze (Florence), Tuscany 50014
Italy

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