Regressive Trend Inflation

Organised by

• Department of Economics

We identify innovations to trend inflation using a standard trend-cycle model. These innovations are linked to permanent monetary policy, oil news, and personal and corporate income tax shocks. Employing sign restrictions, we extract the component of the structural shocks driving trend inflation and analyse their aggregate and distributional effects. The identified shocks account for over two-thirds of trend inflation variation. Except for the corporate tax shocks that benefit poor households in the short run, the shocks we recover reduce significantly the relative consumption of the poor in the medium run. This decline stems primarily from a drop in real labour income, against which poorer households cannot hedge effectively through increased liabilities. These findings highlight the unequal burden of trend-inflation-driving shocks across income groups.

Co-authors: Sebastian Rast, Alejandro Vicondoa.