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What Drives the Recent Surge in Inflation? The Historical Decomposition Roller Coaster

Author

Listed:
  • Bergholt, Drago
  • Canova, Fabio
  • Furlanetto, Francesco
  • Maffei-Faccioli, Nicolò
  • Ulvedal, PÃ¥l

Abstract

What drives the recent inflation surge? To answer this question, one must decompose inflation fluctuations into the contribution of structural shocks. We document how whimsical such a historical shock decomposition can be in standard vector autoregressive (VAR) models. We show that the deterministic component of the VAR tends to be imprecisely estimated, making the shock contributions poorly identified under general conditions. Our preferred approach to solve this problem— the single-unit-root prior—can massively shrink the uncertainty around the estimated deterministic component. Once this uncertainty is taken care of, demand shocks unambiguously appear as the main drivers of the inflation surge in the United States, the euro Area, and in four small open economies.

Suggested Citation

  • Bergholt, Drago & Canova, Fabio & Furlanetto, Francesco & Maffei-Faccioli, Nicolò & Ulvedal, PÃ¥l, 2024. "What Drives the Recent Surge in Inflation? The Historical Decomposition Roller Coaster," CEPR Discussion Papers 19005, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:19005
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    More about this item

    Keywords

    Bayesian vector autoregression; Deterministic component; Single unit root prior; Inflation dynamics;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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