American Economic Journal:
Macroeconomics
ISSN 1945-7707 (Print) | ISSN 1945-7715 (Online)
What Drives the Recent Surge in Inflation? The Historical Decomposition Roller Coaster
American Economic Journal: Macroeconomics
(pp. 34–63)
Abstract
What drives the recent inflation surge? To answer, one must decompose inflation fluctuations into the contribution of structural shocks. We document how whimsical such a shock decomposition can be in standard vector autoregression (VAR) models. We show that the deterministic component of the VAR is imprecisely estimated, making the shock contributions poorly identified. Our preferred approach to solving this problem can massively shrink the uncertainty around the estimated deterministic component. Once this uncertainty is accounted for, demand shocks appear as the main drivers of the inflation surge in the United States, the euro area, and four small open economies.Citation
Bergholt, Drago, Fabio Canova, Francesco Furlanetto, Nicolò Maffei-Faccioli, and Pål Ulvedal. 2026. "What Drives the Recent Surge in Inflation? The Historical Decomposition Roller Coaster." American Economic Journal: Macroeconomics 18 (4): 34–63. DOI: 10.1257/mac.20240209Additional Materials
JEL Classification
- C32 Multiple or Simultaneous Equation Models: Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
- E23 Macroeconomics: Production
- E31 Price Level; Inflation; Deflation