Title page
Contents
Abstract 2
1. Introduction 4
2. Optimal Price Setting with Quasi-kinked Demand 6
3. The Workhorse Macroeconomic Model 8
3.1. Model Overview 9
3.2. Calibration and Solution 10
4. Results 11
4.1. The Phillips Curve 12
4.2. Propagation of Cost-Push Shocks 14
4.3. Monetary Policy Trade-offs During the Post-Covid Period 19
4.4. Conditional Forecast Distributions 24
5. Conclusions 26
References 27
Appendix A. The Smets and Wouters (2007) Model 29
Figure 1. Optimal Price-Setting With Quasi-Kinked Demand 8
Figure 2. Linearized and Nonlinear Phillips Curve with Cost-Push Shocks 13
Figure 3. State-Dependent Effects of Cost-Push Shocks on Inflation 15
Figure 4. State-Dependent Effects of Cost-Push Shocks on the Output Gap 17
Figure 5. Understanding Inflation Risk: Pass-through of Cost-Push Shocks in Inflation Surge and Descend Episodes 18
Figure 6. IRFs to a 1 σ Cost-Push Shock in Linearized and Nonlinear Model in 2022Q1 20
Figure 7. IRFs to a 1 Monetary Shock in Linearized and Nonlinear Model in 2022Q1 22
Figure 8. Trade-offs for Interest Rate Policy: Tightening and Output Cost to Provide Full Inflation Stabilization 23
Figure 9. Conditional Forecast Distributions Given Filtered State in Linearized Model 25
Table A.1. Parameter values in Smets and Wouters (2007) 34
Table A.2. Parameter Values with prior ϕp~N(1.2,0.05) and estimated ϵp 35