Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/147011
Authors: 
Abbate, Angela
Eickmeier, Sandra
Prieto, Esteban
Year of Publication: 
2016
Series/Report no.: 
Discussion Paper, Deutsche Bundesbank 41/2016
Abstract: 
We assess the effects of financial shocks on inflation, and to what extent financial shocks can account for the "missing disinflation" during the Great Recession. We apply a vector autoregressive model to US data and identify financial shocks through sign restrictions. Our main finding is that expansionary financial shocks temporarily lower inflation. This result withstands a large battery of robustness checks. Moreover, negative financial shocks helped preventing a deflation during the latest financial crisis. We then explore the transmission channels of financial shocks relevant for inflation, and find that the cost channel can explain the inflation response. A policy implication is that financial shocks that move output and inflation in opposite directions may worsen the trade-off for a central bank with a dual mandate.
Subjects: 
financial shocks
inflation dynamics
monetary policy
financial frictions
cost channel
sign restrictions
JEL: 
E31
E44
E58
ISBN: 
978-3-95729-310-7
Document Type: 
Working Paper

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