Search Results
Working Paper
Post-COVID Inflation Dynamics: Higher for Longer
In the December 2022 Summary of Economic Projections (SEP), the median projection for four-quarter core PCE inflation in the fourth quarter of 2025 is 2.1 percent. This same SEP has unemployment rising by nine-tenths, to 4.6 percent, by the end of 2023. We assess the plausibility of this projection using a specific nonlinear model that embeds an empirically successful nonlinear Phillips curve specification into a structural model, identifying it via an underutilized data-dependent method. We model core PCE inflation using three components that align with those noted by Chair Powell in his ...
Journal Article
Adjusting Median and Trimmed-Mean Inflation Rates for Bias Based on Skewness
Median and trimmed-mean inflation rates tend to be useful estimates of trend inflation over long periods, but they can exhibit persistent departures from the underlying trend over shorter horizons. In this Commentary, we document that the extent of this bias is related to the degree of skewness in the distribution of price changes. The shift in the skewness of the cross-sectional price-change distribution during the pandemic means that median PCE and trimmed-mean PCE inflation rates have recently been understating the trend in PCE inflation by about 15 and 35 basis points, respectively.
Working Paper
A New Look at Historical Monetary Policy and the Great Inflation through the Lens of a Persistence-Dependent Policy Rule
The origins of the Great Inflation, a central 20th century U.S. macroeconomic event, remain contested. Prominent explanations are poor forecasts or deficient activity gap estimates. An alternative view: the FOMC was unwilling to fight inflation, perhaps due to political pressures. Our findings, based on a novel approach, support the latter view. New econometric tools allow us to credibly identify the particular activity gap, if any, in use. Persistence-dependent unemployment (gap) responses in the 1970s were essentially the same pre- and post-Volcker. Conversely, FOMC behavior vis--vis ...
Working Paper
Is It Time to Reassess the Focal Role of Core PCE Inflation?
In this paper, I review the history of “core” PCE inflation and its rationale: remove volatile items with transitory shocks to better highlight the trend in inflation. Structural changes in the inflation process imply that, on a “reducing volatility” basis, the list of items excluded from the “core” inflation basket (aside from gasoline) is far from optimal. This is true whether one assesses volatility on the basis of a weighted component monthly, or an index monthly, or a 12-month index, or a 5-year index. In addition, I demonstrate other deficiencies of exclusion indexes. ...
Working Paper
All Fluctuations Are Not Created Equal: The Differential Roles of Transitory versus Persistent Changes in Driving Historical Monetary Policy
The historical analysis of FOMC behavior using estimated simple policy rules requires the specification of either an estimated natural rate of unemployment or an output gap. But in the 1970s, neither output gap nor natural rate estimates appear to guide FOMC deliberations. This paper uses the data to identify the particular implicit unemployment rate gap (if any) that is consistent with FOMC behavior. While its ability appears to have improved over time, our results indicate that, both before the Volcker period and through the Bernanke period, the FOMC distinguished persistent movements in ...
Journal Article
Digging into the Downward Trend in Consumer Inflation Expectations
Since mid-2014, the long-run inflation expectations of consumers have been declining. Many commentators blame the decline on gasoline prices, which have also been falling since that time, but we argue that this explanation is incomplete. We analyze University of Michigan Surveys of Consumers microdata and find that a decline in uncertainty about future inflation is a modest part of the story over this period?but it represents the entire story when considering changes in expectations since 2012.
Working Paper
Panel Data Estimates of Age-Rent Profiles for Rental Housing
This paper provides estimates of the net depreciation rate for rental housing using a unique confidential data set from the Bureau of Labor Statistics that covers over 30,000 rental units from 1998 to 2009. Our data and econometric approach allow us to add to the literature in three main ways. First, we can control for unobserved quality (including cohort effects) by allowing for unit-specific fixed effects. Our results suggest that estimates of the depreciation rate for rental housing that ignore unobserved heterogeneity suffer from omitted-variable bias and potentially from selection bias, ...
Working Paper
Finding a Stable Phillips Curve Relationship: A Persistence-Dependent Regression Mode
We establish that the Phillips curve is persistence-dependent: inflation responds differently to persistent versus moderately persistent (or versus transient) fluctuations in the unemployment gap. Previous work fails to model this dependence, so it finds numerous “inflation puzzles”—such as missing inflation/disinflation—noted in the literature. Our model specification eliminates these puzzles; for example, the Phillips curve has not weakened, and inflation is not “stubbornly low” at present. The model’s coefficients are stable, and it provides accurate conditional recursive ...
Journal Article
The CPI–PCEPI Inflation Differential: Causes and Prospects
The Federal Open Market Committee’s inflation target is stated in terms of the personal consumption expenditures price index (PCEPI). The PCEPI, like the consumer price index (CPI), measures inflation in the expenditures of households, but these indexes differ in purpose, scope, and construction. Notably, since the CPI is used as the reference rate for numerous financial contracts, one can derive implied longer-run CPI inflation forecasts from financial contracts. Such forecasts are widely reported. But if policymakers are to use these forecasts to guide their pursuit of the inflation ...