Finance and Economics Discussion Series (FEDS)
December 2024
Measured Inflation and the New-Keynesian Model
Lawrence J. Christiano, Martin Eichenbaum, and Benjamin K. Johannsen
Abstract:
Researchers typically compare inflation in the new Keynesian (NK) model to published inflation measures constructed from indices like the CPI. Inflation in the standard NK model without price indexation is bounded above. The model analogue of fixed-weight inflation measures, like the CPI, is not. When inflation is in the range of values observed after 2021, there is a substantial difference between model-based and fixed-weight measures of inflation. This finding poses a challenge to using linear approximations to the NK model in environments with moderately high inflation and implies that analysts should construct data-consistent model analogues when assessing the NK model.
Keywords: Inflation, New Keynesian Model
DOI: https://doi.org/10.17016/FEDS.2024.095
PDF: Full Paper
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