US inflation and output since the 1970s: a P-star approach

US inflation and output developments since the 1970s are considered using the P-star model and the VAR-based Diebold–Yilmaz spillover index approach. Shocks to monetary variables explain a substantial share of US GDP deflator inflation shocks over time, particularly in the late 1980s and early 1990s but also in recent years, a time when quantitative easing was employed by the Federal Reserve. Monetary factors, and not oil shocks, underlie price developments in the 1970s and early 1980s. Monetary shocks’ influence on oil prices has become noticeably stronger over the past ten years or so, supporting the greater attention being paid of late to the impact of the monetary environment on commodity markets. Shocks to the velocity-of-money variable affect output developments, with the exception of the 1970s and early 1980s when inflation shocks and, to a lesser extent, oil inflation shocks dominate the cross-variance share of output gap shocks. After the Volcker disinflation, the influence of both inflation and oil price shocks on the output gap wane and those of velocity gap shocks increase.