A Model-Based Perspective on Inflation and the Distribution of Relative Price Changes

A series of articles starting in 2022 has discussed the empirical relationship between inflation and the distribution of relative price changes: In the stable regime from 1995 until the pandemic era, the monthly inflation rate was closely related to a measure of asymmetry or skewness in the distribution of relative price changes. In this article, we describe related research that uses a dynamic macroeconomic model to study how inflation is jointly determined by monetary policy and "relative price shocks," as well as other shocks.1 We use that model to help us understand the factors that lead to the relationship emphasized in previous articles.

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