A possible explanation of the missing deflation puzzle

Following the Great Recession, despite large and persistent slowdown in economic activity, the fall in inflation was modest. This is known as the missing deflation puzzle. In this paper, we develop and estimate a New Keynesian model to provide an explanation for the puzzle. The new model allows for time-varying volatility in cross-sectional idiosyncratic uncertainty and accounts for changes in intermediate input prices. We show that inflation did not fall much because intermediate input prices were increasing