Inflation Dynamics during the Financial Crisis

Abstract

In spite of substantial and persistent economic slack, the United States experienced only a mild disinflation during the Great Recession and its aftermath. Consumer price inflation, measured by the core personal consumption expenditures price index, averaged 2 percent between 2003 and 2007 and only declined to an average annual rate of about 1.5 percent over the following eight years, a period that saw the deepest contraction in economic activity since the Great Depression, followed by an uneven and weak recovery. Among many economists, the absence of more pronounced deflationary pressures during this period has cast doubt on the empirical relevance of the Phillips curve-a central tenet of most standard macroeconomic models-which posits that a high level of resource underutilization should cause inflation to fall over time (Hall 2011;King and Watson 2012). NW, Washington, DC 20551 (e-mail: egon.zakrajsek@frb.gov). We thank Rudi Bachmann, Mark Bils, Marco Del Negro, Etienne Gagnon, Marc Giannoni, Yuriy Gorodnichenko, Jim Kahn, Pete Klenow, Emi Nakamura, Joe Vavra, and three anonymous referees for helpful comments and suggestions; we also benefited from comments from participants at numerous conferences and seminars. We are especially grateful to Kristen Reed, Ryan Ogden, and Rozi Ulics of the Bureau of Labor Statistics for their invaluable help with this project and to Jonathan Weinhagen for sharing his expertise with the PPI data.

Financial Stress Regimes and the Macroeconomy

“…This amplification effect arising from financial stress may be compatible with Gilchrist et al. () because our evidence is for the aggregate price level.…”

“…Gilchrist et al. () provide evidence that firms with “weak” balance sheets increased their price during the 2008 crisis, while firms with “strong” balance sheets decreased their prices as expected. Our results support the claim that after a negative financial shock (a type of negative demand shock), aggregate prices go down significantly more during periods of high financial stress than in periods of low financial stress.…”

Price, Product Quality, and Exporter Dynamics: Evidence From China

“…(), Ravina (), and Gilchrist et al. (). In each of these papers, past, external consumption influences current consumer preferences in a fashion similar to that specified in our utility function .…”

“…() and Gilchrist et al. () are primarily interested in explaining the movements of markups or inflation with aggregate shocks. We demonstrate that preferences of this type can also help explain the evolution of firm pricing, product quality, and sales in international export markets.…”

The Passthrough of Labor Costs to Price Inflation

“…See Gilchrist et al. () for an alternative explanation that is based on the interaction of financial frictions with customer markets, as well as for a useful summary of some competing explanations.…”