Nonlinearities with inflation target shock
The DEMS Economics Seminar series is proud to host
Lorenza Rossi
(Lancaster University Management School)
with S. Fasani and M. Miescu
ABSTRACT
We examine sign asymmetries in shocks to the FED inflation target. The shocks are identified by exploiting the generalized forecast error variance of long-run inflation expectations in a non-linear VAR. Negative shocks, reducing the FED inflation target, display a stronger and more prolonged effect on output, investments, and firm entry compared to positive shocks. We rationalize these findings with the lens of a theoretical model. We show that in the second-order solution of the model, the uncertainty introduced by a shock to the inflation target triggers a 'wait and see' mechanism, which interacts with both intensive and extensive investment margins, shaping asymmetric responses in real variables.
The seminar will be in presence, Seminar Room 2104, Building U7-2nd floor