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A Possible Explanation of the Missing Deflation Puzzle

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  • Engin Kara
  • Ahmed Jamal Pirzada

Abstract

During the Great Recession, despite the large fall in output, the fall in inflation was modest. This is known as the missing deflation puzzle. In this paper, we develop and estimate a New Keynesian model to provide an explanation for the puzzle. The new model allows for time-varying volatility in cross-sectional idiosyncratic uncertainty and accounts for changes in intermediate goods prices. We show that inflation did not fall much because intermediate goods prices were increasing during the Great Recession.

Suggested Citation

  • Engin Kara & Ahmed Jamal Pirzada, 2016. "A Possible Explanation of the Missing Deflation Puzzle," Bristol Economics Discussion Papers 16/670, School of Economics, University of Bristol, UK, revised 29 Mar 2017.
    • Handle: RePEc:bri:uobdis:16/670
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    Cited by:

    1. Ahmed Jamal Pirzada, 2017. "Price Stickiness and Intermediate Materials Prices," Bristol Economics Discussion Papers 17/686, School of Economics, University of Bristol, UK.
    2. Melina, Giovanni & Villa, Stefania, 2023. "Drivers of large recessions and monetary policy responses," Journal of International Money and Finance, Elsevier, vol. 137(C).
    3. Massenot, Baptiste & Nghiem, Giang, 2019. "Depressed demand and supply," SAFE Working Paper Series 257, Leibniz Institute for Financial Research SAFE.
    4. Ahmed Jamal Pirzada, 2017. "Energy Price Uncertainty and Decreasing Pass-through to Core Inflation," Bristol Economics Discussion Papers 17/681, School of Economics, University of Bristol, UK, revised 30 May 2017.

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    More about this item

    Keywords

    Price Mark-up Shocks; Great Recession; Inflation; DSGE; Intermediate Inputs.;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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