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Brookings papers on economic activity, 2020, Vol.2020 (1), p.301-357
Ort / Verlag
Brookings Institution Press
Erscheinungsjahr
2020
Link zum Volltext
Quelle
Electronic Journals Library
Beschreibungen/Notizen
The business cycle is alive and well, and real variables respond to it more or less as they always did. Witness the Great Recession. Inflation, in contrast, has gone quiescent. This paper studies the sources of this disconnect using vector autoregressions and an estimated dynamic stochastic general equilibrium model. It finds that the disconnect is due primarily to the muted reaction of inflation to cost pressures, regardless of how they are measured—a flat aggregate supply curve. A shift in policy toward more forceful inflation stabilization also appears to have played some role by reducing the impact of demand shocks on the real economy. The evidence rules out stories centered around changes in the structure of the labor market or in how we should measure its tightness.