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Measured Inflation and the New-Keynesian Model

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Abstract

Researchers typically compare inflation in the new Keynesian (NK) model to published inflation measures constructed from indices like the CPI. Inflation in the standard NK model without price indexation is bounded above. The model analogue of fixed-weight inflation measures, like the CPI, is not. When inflation is in the range of values observed after 2021, there is a substantial difference between model-based and fixed-weight measures of inflation. This finding poses a challenge to using linear approximations to the NK model in environments with moderately high inflation and implies that analysts should construct data-consistent model analogues when assessing the NK model.

Suggested Citation

  • Lawrence J. Christiano & Martin S. Eichenbaum & Benjamin K. Johannsen, 2024. "Measured Inflation and the New-Keynesian Model," Finance and Economics Discussion Series 2024-095, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:2024-95
    DOI: 10.17016/FEDS.2024.095
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    1. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
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    4. Martin M. Andreasen & Anders F. Kronborg, 2022. "The extended perturbation method: With applications to the New Keynesian model and the zero lower bound," Quantitative Economics, Econometric Society, vol. 13(3), pages 1171-1202, July.
    5. Guido Ascari & Argia M. Sbordone, 2014. "The Macroeconomics of Trend Inflation," Journal of Economic Literature, American Economic Association, vol. 52(3), pages 679-739, September.
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    Keywords

    New keynesian model; Inflation;

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