Martin Harding is a Principal Economist in the Canadian Economic Analysis Department at the Bank of Canada. Martin obtained his PhD in economics at DIW Berlin and Freie Universität Berlin. His research interests lie in macroeconomics and monetary economics, focusing on the transmission of monetary policy and the role of financial frictions in business cycle analysis.
We propose a macroeconomic model with a nonlinear Phillips curve that has a flat slope when inflationary pressures are subdued and steepens when inflationary pressures are elevated. Our model can generate more sizable inflation surges due to cost-push and demand shocks than a standard linearized model when inflation is high.
Using a nonlinear New Keynesian model with a financial accelerator, we show that financial frictions generate large state-dependent amplification effects. Shocks propagate more strongly in periods of financial stress. We propose an endogenous regime-switching DSGE framework for efficient estimation and improved model fit.
