A Major Shock Makes Prices More Flexible and May Result in a Burst of Inflation or Deflation / Robert E. Hall.

By:

Hall, Robert E

Contributor(s):

National Bureau of Economic Research

Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w31025.Publication details: Cambridge, Mass. National Bureau of Economic Research 2023.Description: 1 online resource: illustrations (black and white)Subject(s):

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Abstract: The US and other advanced countries suffered bursts of severe inflation in 2021 and the first half of 2022, followed by declines of inflation later in 2022, in some countries. In times of high volatility of price determinants--cost and productivity--inflation can jump upward and fall downward at high speed, contrary to the uniformly sticky behavior associated with traditional Phillips curves. This paper establishes that sectors with standard New Keynesian price stickiness are vulnerable to rapid transitions from stickiness to flexibility, as sellers elect to reset their prices and abandon anchoring. The paper shows that the cross-industry volatility of price determinants grew substantially in the inflation episode accompanying the pandemic. Volatility remained elevated even in late 2022. The logic of the New Keynesian model of the Phillips curve links inflation to volatility, because a larger fraction of sellers are pushed out of their regions of inaction when volatility is elevated. The New Keynesian Phillips curve becomes much steeper in volatile times.

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Working Paper	Biblioteca Digital	Colección NBER	nber w31025 (Browse shelf(Opens below))	Not For Loan

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Previous	nber w31022 Biodiversity Finance /	nber w31023 Do Older Adults Accurately Forecast Their Social Security Benefits? /	nber w31024 International Sanctions and Dollar Dominance /	nber w31025 A Major Shock Makes Prices More Flexible and May Result in a Burst of Inflation or Deflation /	nber w31026 The Macroeconomics of Trade Credit /	nber w31027 Identification in a Binary Choice Panel Data Model with a Predetermined Covariate /	nber w31028 The Race Between Education, Technology, and the Minimum Wage /	Next

March 2023.

The US and other advanced countries suffered bursts of severe inflation in 2021 and the first half of 2022, followed by declines of inflation later in 2022, in some countries. In times of high volatility of price determinants--cost and productivity--inflation can jump upward and fall downward at high speed, contrary to the uniformly sticky behavior associated with traditional Phillips curves. This paper establishes that sectors with standard New Keynesian price stickiness are vulnerable to rapid transitions from stickiness to flexibility, as sellers elect to reset their prices and abandon anchoring. The paper shows that the cross-industry volatility of price determinants grew substantially in the inflation episode accompanying the pandemic. Volatility remained elevated even in late 2022. The logic of the New Keynesian model of the Phillips curve links inflation to volatility, because a larger fraction of sellers are pushed out of their regions of inaction when volatility is elevated. The New Keynesian Phillips curve becomes much steeper in volatile times.