Financial shocks and inflation dynamics

Abstract We assess the effects of financial shocks on inflation, and to what extent can account for “missing disinflation” during Great Recession. apply a Bayesian vector autoregressive model US data identify through combination narrative short-run sign restrictions. Our main finding is that contractionary temporarily increase inflation. This result withstands large battery robustness checks. Negative help therefore explain why inflation did not drop more sharply in aftermath crisis. analysis suggests higher borrowing costs after negative modest decrease A policy implication act as supply-type shocks, moving output opposite directions, thereby worsening trade-off central bank with dual mandate.