What Drives the Recent Surge in Inflation? The Historical Decomposition Roller Coaster
The Milan Time Series Seminar group is proud to host
Fabio Canova
(Universitat Carlos III, BI Norwegian Business School, Budapest School for Central Banking Studies)
with D. Bergholt, F. Furlanetto, N. Maffei-Faccioli and P. Ulvedal
ABSTRACT
What drives the inflation surge in the post-Covid period? To answer this question, one must decompose observable fluctuations into the contributions due to structural shocks. We document how whimsical a historical shock decomposition can be in standard vector autoregressive models. Neglecting the uncertainty surrounding the deterministic component of the model implies implausible behavior for shocks over history under general conditions. Our favorite approach to solving the problem, the single unit prior, shrinks the massive uncertainty around the deterministic components toward their sample mean values. With such a prior and a standard sign-identified VAR, demand shocks are the main drivers of the current inflation surge, both in the United States and in the euro area.
The seminar will be in presence, DEMS Seminar Room 2104, Building U7-2nd floor