The Inflation Rate Disconnect Puzzle: On the International Component of Trend Inflation and the Flattening of the Phillips Curve (Joint with Guido Ascari)

Since 1990 US inflation has remained silent to domestic slack and monetary interventions. This paper explores the role of globalisation in explaining the puzzling behaviour of inflation, using a trend-cycle VAR decomposition. The trend analysis shows that, starting from the 90s, despite very well-anchored expectations, slow-moving imported “cost-push” factors kept trend inflation below target. The cycle block of the model provides evidence in favour of the flattening of Phillips curve, mainly attributable to a weaker wage pass-through. The business cycle behaviour of inflation is determined by a shock originating abroad, which indeed generates the main bulk of volatility in international prices and is poorly connected to the domestic slack