Skip to:
  1. Main navigation
  2. Main content
  3. Footer
Working Paper

The Hard Road to a Soft Landing: Evidence from a (Modestly) Nonlinear Structural Model

Download pdf
What drove inflation so high in 2022? Can it drop rapidly without a recession? The Phillips curve is central to the answers; its proper (nonlinear) specification reveals that the relationship is strong and frequency dependent, and inflation is very persistent. We embed this empirically successful Phillips curve – incorporating a supply-shocks variable – into a structural model. Identification is achieved using an underutilized data-dependent method. Despite imposing anchored inflation expectations and a rapid relaxation of supply-chain problems, we find that absent a recession, inflation will be more than 3 percent by the end of 2025. A simple welfare analysis supports a mild recession as preferred to an extended period of elevated inflation, under a typical loss function.
Topics
Inflation
Econometrics modeling and forecasting
01.09.2023ISSN 2573-7953 WP 23-03DOI 10.26509/frbc-wp-202303
Keywords Nonlinear Phillips Curve, Frequency Decomposition, Supply Price Pressures, Structural VAR, Nonlinear Impulse Response Functions, Welfare Analysis
JEL Classification Codes E31, E32, E52, C32

Working Papers of the Federal Reserve Bank of Cleveland are preliminary materials circulated to stimulate discussion and critical comment on research in progress. They may not have been subject to the formal editorial review accorded official Federal Reserve Bank of Cleveland publications. The views expressed in this paper are those of the authors and do not represent the views of the Federal Reserve Bank of Cleveland or the Federal Reserve System.

Suggested Citation

Verbrugge, Randal J., and Saeed Zaman. 2023. “The Hard Road to a Soft Landing: Evidence from a (Modestly) Nonlinear Structural Model.” Federal Reserve Bank of Cleveland, Working Paper No. 23-03. https://doi.org/10.26509/frbc-wp-202303