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Mixing it up: Inflation at risk

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  • Maximilian Schroder

Abstract

Assessing the contribution of various risk factors to future inflation risks was crucial for guiding monetary policy during the recent high inflation period. However, existing methodologies often provide limited insights by focusing solely on specific percentiles of the forecast distribution. In contrast, this paper introduces a comprehensive framework that examines how economic indicators impact the entire forecast distribution of macroeconomic variables, facilitating the decomposition of the overall risk outlook into its underlying drivers. Additionally, the framework allows for the construction of risk measures that align with central bank preferences, serving as valuable summary statistics. Applied to the recent inflation surge, the framework reveals that U.S. inflation risk was primarily influenced by the recovery of the U.S. business cycle and surging commodity prices, partially mitigated by adjustments in monetary policy and credit spreads.

Suggested Citation

  • Maximilian Schroder, 2024. "Mixing it up: Inflation at risk," Papers 2405.17237, arXiv.org, revised May 2024.
    • Handle: RePEc:arx:papers:2405.17237
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    References listed on IDEAS

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