Inflation Dynamics and Time-Varying Volatility: New Evidence and an Ss Interpretation

No 19148, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Is monetary policy less effective at increasing real output during periods of high volatility than during normal times? In this paper, I argue that greater volatility leads to an increase in aggregate price flexibility so that nominal stimulus mostly generates inflation rather than output growth. To do this, I construct price-setting models with "volatility shocks" and show these models match new facts in CPI micro data that standard price-setting models miss. I then show that these models imply output responds less to nominal stimulus during times of high volatility. Furthermore, since volatility is countercyclical, this implies that nominal stimulus has smaller real effects during downturns. For example, the estimated output response to additional nominal stimulus in September 1995, a time of low volatility, is 55 percent larger than the response in October 2001, a time of high volatility.

JEL-codes: D8 E10 E30 E31 E50 (search for similar items in EconPapers)
Date: 2013-06
New Economics Papers: this item is included in nep-cba and nep-mon
Note: ME
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Citations: View citations in EconPapers (83)

Published as Joseph Vavra, 2013. "Inflation Dynamics and Time-Varying Volatility: New Evidence and an Ss Interpretation," The Quarterly Journal of Economics, Oxford University Press, vol. 129(1), pages 215-258.

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Related works:
Journal Article: Inflation Dynamics and Time-Varying Volatility: New Evidence and an Ss Interpretation (2014)
Working Paper: Inflation Dynamics and Time-Varying Uncertainty: New Evidence and an Ss Interpretation (2011)
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