The swing of the inflation dynamics across OECD countries

Abstract

In recent business cycles, U.S. inflation has experienced a reduction in inflation volatility, inflation persistence and, a severe weakening of the correlation with nominal interest (Gibson's paradox). This project concludes that the empirical evidence found in the U.S. extends to other OECD countries such as Canada, Australia, the UK and France characterized by having an independent central bank. Furthermore, we examine inflation dynamics in the U.S. with a 4-equation DSGE model augmented with money. Our model qualitatively reproduces the swings in inflation statistics, but lacks sources of nominal and real rigidity to fully capture the Gibson's paradox. In spite of these model ́s limitations, we find changes in price stickiness, the monetary policy rule, and the persistence of inflationary shocks as main explanatory factors of the Gibson paradox.