In the immediate wake of the Great Recession we didn't see the disinflation that most models predicted and, subsequently, we didn't see the inflation they predicted. We show that these puzzles disappear in a Vector Autoregressive model that properly accounts for domestic and global factors. Such a model reveals, among others, that domestic factors explain much of the inflation dynamics in the 2012-2014 euro area missing inflation episode. Consequently, economists and models that excessively focused on the global nature of inflation were liable to miss the contribution of deflationary domestic shocks during this episode.

This comment provides a correction to the paper "Is the Phillips Curve Alive and Well After All? Inflation Expectations and the Missing Disinflation" by Olivier Coibion and Yuriy Gorodnichenko (2015) in the American Economic Journal: Macroeconomics.

We evaluate possible explanations for the absence of a persistent decline in inflation during the Great Recession and find commonly suggested explanations to be insufficient. We propose a new explanation for this puzzle within the context of a standard Phillips curve. If firms' inflation expectations track those of households, then the missing disinflation can be explained by the rise in their inflation expectations between 2009 and 2011. We present new econometric and survey evidence consistent with firms having similar expectations as households. The rise in household inflation expectations from 2009 to 2011 can be explained by the increase in oil prices over this time period.

Inflation and unemployment rate were largely disconnected between 2000 and 2019 in advanced economies. We decompose core inflation into two parts based on the cyclical sensitivity of CPI components and document several salient facts: (i) both the cyclical and non-cyclical parts had surges across advaced economies in 2011, when unemployment rates had limited changes; (ii) the non-cyclical part had a downward trend between 2012 and 2019, which existed across countries, sectors, goods, and services; (iii) global indexes such as oil price, shipping costs, and a global supply chain pressure index do not explain the downward trend; and (iv) the cyclical part, after controlling for the impact of economic slack, also had a downward trend between 2012 and 2019. These patterns help disentangle competing explanations for the disconnect between inflation and unemployment rate. The approach has potential to help understand forces shaping price pressures during the pandemic and in the post-pandemic period ahead.

.In line with New-Keynesian predictions and certain historical trajectories that tracked by inflation during past crises, the context of the Great Recession should have spurred a sharp fall in inflation or even deflation. On the contrary, the sensitivity of inflation to changes in unemployment has diminished, giving rise to the paradox of missing disinflation. By investigating this paradox, this article develops a variant of the New-Keynesian models where mechanisms of depreciation of human capital are implemented. In the model, rising unemployment translates into a relatively large increase in long-term unemployment. Unemployed people with low levels of human capital become dominant and more workers are now likely to suffer from depreciation of human capital. The depreciation weakens the intensity with which the unemployed prospect new jobs and moderates the decline in wages and prices. Calibrated to the United States economy, model simulations show that this model variant compares relatively better the highlights of missing disinflation than a New-Keynesian without depreciation of human capital. In response to shocks of the same size, the response of inflation in the model with depreciation of human capital is 3 to 4-fold less than in standard New-Keynesian models.

Inflation is regarded by the many as a menace that damages business and can only make life worse for households. Keeping it low depends critically on ensuring that firms and workers expect it to be low. So expectations of inflation are a key influence on national economic welfare. This collection pulls together a galaxy of world experts (including Roy Batchelor, Richard Curtin and Staffan Linden) on inflation expectations to debate different aspects of the issues involved. The main focus of the volume is on likely inflation developments. A number of factors have led practitioners and academic observers of monetary policy to place increasing emphasis recently on inflation expectations. One is the spread of inflation targeting, invented in New Zealand over 15 years ago, but now encompassing many important economies including Brazil, Canada, Israel and Great Britain. Even more significantly, the European Central Bank, the Bank of Japan and the United States Federal Bank are the leading members of another group of monetary institutions all considering or implementing moves in the same direction. A second is the large reduction in actual inflation that has been observed in most countries over the past decade or so. These considerations underscore the critical – and largely underrecognized - importance of inflation expectations. They emphasize the importance of the issues, and the great need for a volume that offers a clear, systematic treatment of them. This book, under the steely editorship of Peter Sinclair, should prove very important for policy makers and monetary economists alike.

.In line with New-Keynesian predictions and certain historical trajectories that tracked by inflation during past crises, the context of the Great Recession should have spurred a sharp fall in inflation or even deflation. On the contrary, the sensitivity of inflation to changes in unemployment has diminished, giving rise to the paradox of missing disinflation. By investigating this paradox, this article develops a variant of the New-Keynesian models where mechanisms of depreciation of human capital are implemented. In the model, rising unemployment translates into a relatively large increase in long-term unemployment. Unemployed people with low levels of human capital become dominant and more workers are now likely to suffer from depreciation of human capital. The depreciation weakens the intensity with which the unemployed prospect new jobs and moderates the decline in wages and prices. Calibrated to the United States economy, model simulations show that this model variant compares relatively better the highlights of missing disinflation than a New-Keynesian without depreciation of human capital. In response to shocks of the same size, the response of inflation in the model with depreciation of human capital is 3 to 4-fold less than in standard New-Keynesian models.