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Determinants of Inflation - Evidence from Sweden

Sundén, Gustav LU and Skeppås, Emanuel LU (2022) NEKN01 20221
Department of Economics
Abstract
This thesis examines what have been the main drivers of inflation in Sweden in recent years. This is done through the New Keynesian Phillips Curve with marginal cost which serves as the theoretical background to explain inflationary behavior. An extension to the New Keynesian Phillips Curve with marginal cost is made by adding four suggested inflation drivers apparent in recent years. The contributions of each driver to inflation development are estimated using a Structural Vector Autoregression model with Bayesian methods. The result showed that inflation in 2020 was mainly driven by the output gap and labor market activity, whilst in 2021 more transitory shocks such as energy price and supply chain shocks were more prevalent. The... (More)
This thesis examines what have been the main drivers of inflation in Sweden in recent years. This is done through the New Keynesian Phillips Curve with marginal cost which serves as the theoretical background to explain inflationary behavior. An extension to the New Keynesian Phillips Curve with marginal cost is made by adding four suggested inflation drivers apparent in recent years. The contributions of each driver to inflation development are estimated using a Structural Vector Autoregression model with Bayesian methods. The result showed that inflation in 2020 was mainly driven by the output gap and labor market activity, whilst in 2021 more transitory shocks such as energy price and supply chain shocks were more prevalent. The forecast from the model indicates that energy prices and foreign monetary policy shocks will be more dominating. A shift can be seen as Sweden hit the Zero Lower Bound with monetary policy importance almost disappearing, government spending became partly deflationary and stronger influence from energy prices. Robustness tests support the results with, e.g. a more parsimonious model, albeit with more contribution from government spending. Lastly, the results support that the relationship of the New Keynesian Phillips Curve still holds to a degree, although when considering other periods, other extensions may be preferred. (Less)
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author
Sundén, Gustav LU and Skeppås, Emanuel LU
supervisor
organization
course
NEKN01 20221
year
type
H1 - Master's Degree (One Year)
subject
keywords
Bayesian Vector Autoregression, Structural Vector Autoregression, New Keynesian Phillips Curve, Inflation, Sign and Zero Restrictions
language
English
id
9085081
date added to LUP
2022-10-10 09:25:17
date last changed
2022-10-10 09:25:17
@misc{9085081,
  abstract     = {{This thesis examines what have been the main drivers of inflation in Sweden in recent years. This is done through the New Keynesian Phillips Curve with marginal cost which serves as the theoretical background to explain inflationary behavior. An extension to the New Keynesian Phillips Curve with marginal cost is made by adding four suggested inflation drivers apparent in recent years. The contributions of each driver to inflation development are estimated using a Structural Vector Autoregression model with Bayesian methods. The result showed that inflation in 2020 was mainly driven by the output gap and labor market activity, whilst in 2021 more transitory shocks such as energy price and supply chain shocks were more prevalent. The forecast from the model indicates that energy prices and foreign monetary policy shocks will be more dominating. A shift can be seen as Sweden hit the Zero Lower Bound with monetary policy importance almost disappearing, government spending became partly deflationary and stronger influence from energy prices. Robustness tests support the results with, e.g. a more parsimonious model, albeit with more contribution from government spending. Lastly, the results support that the relationship of the New Keynesian Phillips Curve still holds to a degree, although when considering other periods, other extensions may be preferred.}},
  author       = {{Sundén, Gustav and Skeppås, Emanuel}},
  language     = {{eng}},
  note         = {{Student Paper}},
  title        = {{Determinants of Inflation - Evidence from Sweden}},
  year         = {{2022}},
}