CFCM Seminar: Lorenza Rossi (Lancaster University)

This is an in-person event

Title:  Nonlinearities with de-anchored inflation expectation (with Mirela Miescu and Stefano Fasani)

Abstract:  Using a threshold VAR model, we analyze the nonlinear effects of shocks to the FED perceived inflation target. The shocks are identified as VAR innovations that make the largest contribution to future movements in long-horizon inflation expectations. We find that negative shocks to the perceived inflation target have a stronger effect on output, consumption, investments, and net entry of firms than positive shocks. Further, we find that in a low-inflation regime, the asymmetric effects of the shocks are even stronger than in a high-inflation regime. We rationalize these results through the lens of a medium-scale model with endogenous firm entry and exit. We claim that the entry costs channel plays an important role in shaping the asymmetric responses of the extensive margin of investments, bringing about an asymmetric response of aggregate investments and economic activity.

Host:  Giammario Impullitti