Inflation dynamics (Ball and Mazumber)

Inflation dynamics and the Great Recession by Laurence Ball and Sandeep Mazumder, published by IMF. “This paper examines inflation dynamics in the United States since 1960, with a particular focus on the Great Recession. A puzzle emerges when Phillips curves estimated over 1960-2007 are used to predice inflation over 2008-2010: inflation should have fallen by more than it did. It is not clear whether expectations are sufficiently anchored to prevent deflation over the next few years. Finally, we show that the Great Recession provides fresh evidence against the New Keynesian Phillips curve with rational expectations.”