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Inflation Surprises in a New Keynesian Economy with a True Consumption Function

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  • Roberto Tamborini

Abstract

The resurgence of inflation since the late 2021 is now accompanied by a reversal of prospects of growth, reviving fears of stagflation across the world (IMF 2022, World Bank 2022). In almost all accounts of the mounting stagflation threats a prominent role is played by the fall of households' purchasing power, and hence consumption, owing to the inflation shock visà-vis nominal wages lagging behind. The theoretical issue that motivates this paper is that this endogenous real income effect of inflation surprises, independent of restrictive monetary policy, is not present in the standard New Keynesian models for monetary policy. The paper shows how this channel can be introduced reformulating the consumption function, with the consequence that it exerts a stabilisation effect on inflation endogenously. By means of simulations the paper discusses the main monetary policy implication: what is the role left to monetary policy which purports to curb inflation in the same way?

Suggested Citation

  • Roberto Tamborini, 2022. "Inflation Surprises in a New Keynesian Economy with a True Consumption Function," CESifo Working Paper Series 10194, CESifo.
    • Handle: RePEc:ces:ceswps:_10194
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    More about this item

    Keywords

    cost-push inflation; real income effect; stagflation; New Keynesian models for monetary policy;
    All these keywords.

    JEL classification:

    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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