SEMINAR: Nonlinearities with de-anchored inflation expectations Seminar
Speaker: Lorenza Rossi (Lancaster)
Abstract: Using a threshold VAR model, we analyse the sign asymmetries of shocks to the FED 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 that reduce the FED inflation target have a stronger and more prolonged effect on output, investments, and net entry of firms than positive shocks that increase the target. We rationalize these results through the lens of a medium-scale model with endogenous firm entry and exit. We claim that the investment channel and in particular the entry costs channel play an important role in shaping the asymmetric responses of the extensive and the intensive margin of investments, bringing about an asymmetric response of aggregate investments and economic activity.
Host: Paulo Santos Monteiro (York)