What do Long Data Tell Us About the

Inflation Hike Post COVID-19 Pandemic?

Stephanie Schmitt-Grohé Martı́n Uribe

Columbia University

January 5, 2024

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Stephanie Schmitt-Grohé and Martı́n Uribe Columbia University

CPI Inflation, United States, 1900–2022

15

10

-5

-10

1900 1920 1940 1960 1980 2000 2020

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Stephanie Schmitt-Grohé and Martı́n Uribe Columbia University

The Empirical Model∗

πt = inflation rate
it = nominal interest rate
yt = log of real output per capita

Xtm = permanent monetary shock

Xtr = permanent natural rate shock
Xt = permanent productivity shock

Cyclical components of πt , it, and yt

π̂t ≡ πt − Xtm
ît ≡ it − Xtm − Xtr
ŷt ≡ yt − Xt − δXtr

The focus of the present paper is the behavior of the latent variable
Xtm representing the permanent component of inflation.
∗ The model is that of Schmitt-Grohé and Uribe (2022, ‘The Macroeconomic Consequences of Natural Rate Shocks: An Empirical
Investivation’), which in turn builds on Uribe (2022).

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Stephanie Schmitt-Grohé and Martı́n Uribe Columbia University

• The law of motion of the stationary endogenous variables

 
∆Xtm
ztm
   
ŷt ŷt−1
 
 
 
 π̂t  = B  π̂t−1  + C  ∆Xt ,
   
 
ît ît−1 
 zt 

∆Xtr
where ztm = a stationary monetary shock and zt = a stationary real
shock

• The exogenous shocks follow univariate AR(1) processes,

m
X
 
 m
∆Xt+1
  
∆Xtm t+1
m
m ztm zt+1
 
zt+1
     
     
X
   
 ∆Xt+1  = ρ ∆Xt  + Ψ ,

     t+1
zt zt+1
 

 zt+1 




  
r ∆Xtr
 
r
∆Xt+1 Xt+1
with ρ and Ψ diagonal and st , for s = X m, z m, X, z, X r , i.i.d. N (0, 1).

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Stephanie Schmitt-Grohé and Martı́n Uribe Columbia University

Observation equations

Observables:
∆yt = output growth
∆πt = change in consumer price inflation
∆it = change in the short-term nominal interest rate
y
∆yt = ŷt − ŷt−1 + ∆Xt + δ∆Xtr + µt ,

∆πt = π̂t − π̂t−1 + ∆Xtm + µπ

t,

∆it = ît − ît−1 + ∆Xtm + ∆Xtr + µit,

where µst, for s = y, π, i, are normally distributed mean-zero i.i.d.
measurement errors

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Stephanie Schmitt-Grohé and Martı́n Uribe Columbia University

Inflation and Its Permanent Component: 1900 to 2022 Sample

15

10

-5

-10

1900 1920 1940 1960 1980 2000 2020

Notes. Xtm is computed by two-sided smoothing using the Kalman filter at the posterior mean of the vector of estimated parameters
and is normalized by adding a constant to match the sample mean of inflation.

π2022 − π2019 = 6.0%; m

X2022 m
− X2019 = 1.3%

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 Stephanie Schmitt-Grohé and Martı́n Uribe Columbia University

Inflation and Its Permanent Component: 1900–2022 vs 1955–2022

Sample: 1900 to 2022 Sample: 1955 to 2022

15 15

10 10

5 5

0 0

-5 -5

-10 -10

1900 1920 1940 1960 1980 2000 2020 1900 1920 1940 1960 1980 2000 2020

m
X2022 m
− X2019 = 1.3% m
X2022 m
− X2019 = 5.0%

• Between 2019 and 2022 the permanent component of inflation

experienced an increase of 1.3% when model is estimated on 1900-
2022 data but of 5.0% when model is estimated on 1955-2022
data.
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Stephanie Schmitt-Grohé and Martı́n Uribe Columbia University

Impulse Response to Monetary Shocks: 1900 to 2022 Sample

1
2

0.5
1.5

1 0

0.5
-0.5
0
-1
0 2 4 6 8 10 0 2 4 6 8 10

1.5
0

1 -0.2

-0.4
0.5
-0.6
0
-0.8

-0.5 -1
0 2 4 6 8 10 0 2 4 6 8 10

Notes. Posterior mean of impulse responses with 95-percent asymmetric Sims-Zha error bands.

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Stephanie Schmitt-Grohé and Martı́n Uribe Columbia University

Impulse Response to Monetary Shocks

Sample: 1900 to 2022 Sample: 1955 to 2022

1 2 1
2
1.5
0.5
1.5
0.5
1
1 0
0.5 0
0.5
-0.5
0 0

-1 -0.5
0 2 4 6 8 10 0 2 4 6 8 10 0 2 4 6 8 10 0 2 4 6 8 10

1.5 1.5 0.2

0
0
1 -0.2 1

-0.2
-0.4
0.5 0.5
-0.6 -0.4

0 0
-0.8 -0.6

-0.5 -1 -0.5 -0.8

0 2 4 6 8 10 0 2 4 6 8 10 0 2 4 6 8 10 0 2 4 6 8 10

• Impulse responses to monetary shocks (transitory or permanent)

are little affected by sample.

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Stephanie Schmitt-Grohé and Martı́n Uribe Columbia University

Conclusion

• Seen from the perspective of a model estimated on postwar data

the post-COVID-19 inflation spur is interpreted to be associated
with a large increase in the permanent component of inflation.

• For the sample that includes the sudden, large, and short-lived
swings in inflation observed in the first half of the 20th century, the
same model attributes only a minor fraction of the post-COVID-19
inflation to an increase in its permanent component.

• The monetary transmission mechanism is estimated to be stable

across the two sample periods.

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