Inflation persistence in central and eastern European countries

This article studies inflation persistence with time-varying coefficient autoregressions for 12 central European countries in comparison with the United States and the euro area. We find that inflation persistence tends to be higher in times of high inflation. Since the oil price shocks, inflation persistence has declined both in the United States and the euro area. In most central and eastern European countries, for which our study covers 1993–2012, inflation persistence has also declined, with the main exceptions of the Czech Republic, Slovakia and Slovenia, where persistence seems to be rather stable. Our findings have implications for the conduct of monetary policy and for a possible membership in the euro area. Among the two time-varying coefficient methods we use, our results favour the flexible least squares smoother over the Kalman smoother. We also conclude that the OLS estimate of an autoregression is likely upward biased relative to the time-average of time-varying parameters, when the parameters change.     

Central Bank Independence,Inflation and Uncertainty: The Case of Colombia

Colombia undertook reform of its central bank in 1991, pushing it in the direction of greater independence. We find that this reform led to a significant decrease in the level of inflation, as well as inflation uncertainty, suggesting an increase in credibility. However, there has also been an increase in inflation persistence since reform. The lower mean but greater persistence of inflation indicates that central bank independence has shifted the Phillips curve inward but also flattened it, a result consistent with recent research for the Euro-zone and the United States. Finally, further analysis reveals that, in accordance with the Friedman-Ball hypothesis, higher inflation raises uncertainty in Colombia, but that uncertainty does not increase inflation.     

UNEMPLOYMENT PERSISTENCE AND THE NAIRU: A BAYESIAN APPROACH

This paper estimates the United States and euro area NAIRU in a Bayesian framework. We set out a simple structural model explaining unemployment by demand and supply factors, which are treated as unobserved variables that have observable effects on measured unemployment, output and inflation. The model allows for unemployment persistence and a time-varying core inflation rate. The results show that although cyclical shocks are very persistent, most of the increase in European unemployment is driven by structural factors. The degree of persistence is lower in the United States but demand shocks seem to be more important in explaining variation in unemployment.     

US inflation dynamics on long-range data

In this article, we evaluate inflation persistence in the United States using long-range monthly and annual data. The importance of inflation persistence is crucial to policy authorities and market participants, since the level of inflation persistence provides an indication on the susceptibility of the economy to exogenous shocks. Departing from classic econometric approaches found in the relevant literature, we evaluate inflation persistence through the nonparametric Hurst exponent within both a global and a rolling window framework. Moreover, we expand our analysis to detect the potential existence of chaos in the data generating process, in order to enhance the robustness of our conclusions. Overall, we find that inflation persistence is high from 1775 to 2013 for the annual data-set and from February 1876 to May 2014 in monthly frequency, respectively. Especially from the monthly data-set, the rolling window approach allows us to derive that inflation persistence has reached to historically high levels in the post–Bretton Woods period and remained there ever since.     

Inflation Targeting and Inflation Persistence

This paper argues that the adoption of an inflation target reduces the persistence of inflation.We develop the theoretical literature on inflation persistence by introducing a Taylor Rule for monetary policy into a model of persistence and showing that inflation targets reduce inflation persistence.We investigate changes in the time series properties of inflation in seven countries that introduced inflation targets in the late 1980s or early 1990s.We find that the persistence of inflation is greatly reduced or eliminated following the introduction of inflation targets.     

Time variation in inflation persistence: New evidence from modelling US inflation

This article explores how inflation persistence relates to the conduct and goals of monetary policy by presenting a new approach to modelling US inflation persistence and the Fed's dual mandate. Our framework fills a gap in pre-existing models by more flexibly accounting for diverse dynamic properties and shocks. Estimating a Phillips Curve model augmented with inflation volatilities and expectations, we find that the degree of monthly inflation persistence is time variant since World War II. Variations in persistence continue to be observed regardless of the absolute level of inflation and the extent of the trade-off between inflation and unemployment. We demonstrate that inflation persistence varies in line with expectations formed by memories of past inflation. This supports the case for more flexible monetary policy at times, as in the 1980s or especially the present decade, when inflation is more persistent.     

On the dynamics of inflation persistence around the world

We study the dynamics of inflation persistence in 45 countries for the period 1960–2008 using a recently developed test for multiple changes in persistence, which decomposes the sample information between adjacent I (0) and I (1) periods. We find that: (i) inflation persistence and average inflation tend to fall and rise at the same time; (ii) in some countries there are changes in the level of inflation which do not seem to be related to changes in inflation persistence; (iii) around half of the countries analyzed do not present any burst of I (1) behavior, and hence have stationary inflation throughout; (iv) for the other half, we detect switches of the type I (0) ? I (1) ? I (0), hence, inflation persistence, when it has occurred, has been temporal; and, (v) for about half of the countries in which inflation has presented I (1) behavior, persistent inflation lasted more than a decade. In addition, we find that in the last 50 years there have been mainly two episodes where long bursts of I (1) inflation took place simultaneously among groups of countries. In general, the “Great Inflation” occurred during the seventies and eighties in advanced economies, whereas it occurred during the eighties and nineties in emerging economies, particularly in Latin America.     

Using mean reversion as a measure of persistence

This paper suggests a new scalar measure of persistence together with a companion estimator, which has the advantage of not requiring the specification and estimation of a model for the series under investigation. The statistical properties of the companion estimator are established, which allow tests of hypotheses to be performed, under very general conditions. The use of the new measure is illustrated by re-evaluating persistence of inflation for the United States and the Euro Area. The conclusions for the United States do not differ significantly from what has been found in previous empirical studies. However, for the Euro Area we find evidence of a significant break occurring in 2001/2002, such that persistence becomes virtually nil for the period that follows the launch of the euro and the implementation of a common monetary policy by the European Central Bank.     

Inflation Targeting and Regional Inflation Persistence: Evidence from Korea

The adoption of a credible monetary policy regime such as inflation targeting is known to reduce the persistence of inflation fluctuations. This conclusion, however, is typically derived from aggregate inflation or sectoral inflation rates, not from regional inflation data. This paper studies the regional dimension of inflation targeting; that is, the consequences of inflation targeting for regional inflation persistence. Based on data for Korean cities and provinces it is shown that the adoption of inflation targeting leads: (i) to a fall in inflation persistence at the regional level; and (ii) to a reduction in the cross‐regional heterogeneity in inflation persistence. A factor model lends further support to the role of the common component, and, hence, monetary policy, for regional inflation persistence.     

Has Inflation Persistence Changed under EMU?

This paper analyzes the persistence of inflation in the euro area and, in particular, whether the persistence properties have changed since the start of European Monetary Union(EMU). For that purpose, we compare pre‐ and post‐EMU inflation persistence, use rolling‐window estimates of persistence, and apply tests specifically designed to detect break dates near the end of the sample period. In contrast to previous research, we find that inflation persistence has fallen significantly since the start of EMU. Persistence of consumer price inflation, which is central to the European Central Bank's policy mandate, has fallen more than the persistence of deflator inflation. The drop in inflation persistence is consistent with the results from a simulated small New Keynesian model with a shift toward a more aggressive monetary policy stance.     

The Optimal Perception of Inflation Persistence is Zero

This study shows that, in an economy with inflation persistence, it is always welfare improving for a central bank that operates under discretion to behave as if there were no inflation persistence. Under reasonable assumptions about inflation persistence, all of the inefficiency associated with discretionary policymaking is then removed.     

Time-varying persistence in US inflation

The persistence property of inflation is an important issue not only for economists, but especially for central banks, given that the degree of inflation persistence determines the extent to which central banks can control inflation. Further, not only is it the level of inflation persistence that is important in economic analyses, but also the question of whether the persistence varies over time, for instance, across business cycle phases, is equally pertinent, since assuming constant persistence across states of the economy is sure to lead to misguided policy decisions. Against this backdrop, we extend the literature on long-memory models of inflation persistence for the US economy over the monthly period of 1920:1–2014:5, by developing an autoregressive fractionally integrated moving-average-generalized autoregressive conditional heteroskedastic model with a time-varying memory coefficient which varies across expansions and recessions. In sum, we find that inflation persistence does vary across recessions and expansions, with it being significantly higher in the former than in the latter. As an aside, we also show that persistence of inflation volatility is higher during expansions than in recessions. Understandably, our results have important policy implications.     

The stability of the Turkish Phillips curve and alternative regime shifting models

This article, presents empirical evidence supporting instability of the Phillips curve in Turkey. We employ the multiple structural break models and the Markov-switching models and then evaluate the performance of the two models. The data pertain to the monthly inflation rate in Turkey for the period of 1987 to 2004. The results show that the Turkish Phillips curve is not linear. There exists no evidence on the asymmetry in the inflation response to output gap. The persistence of inflation is found to be much lower than in linear models. After 2001, slight decline in persistence of inflation is observed. There exits weaker support for the Phillips curve for the periods where the policymakers attempt to take the advantage of the tradeoff between output and inflation relationship.     

The changing nature of inflation persistence in Switzerland

This note analyzes the persistence of inflation in Switzerland. In particular, we assess the impact of the new monetary framework adopted by the SNB in 2000 on inflation persistence. A set of rolling-window estimates shows that inflation persistence has fallen significantly since the end of the 1990s.     

中国的通货膨胀惯性与通货膨胀不确定性——基于有限理性NKPC模型的分析

本文拓展有限理性菲利普斯曲线模型并结合中国参数进行校准,然后利用校准模型研究中国通货膨胀惯性特征及其与通货膨胀不确定性之间的关系。结果显示,有限理性菲利普斯曲线模型能很好地模拟出与中国实际通货膨胀惯性类似的特征。进一步研究还发现,研究样本期间,中国通货膨胀惯性总体上呈现先上升而逐渐下降的驼峰型特征,而且与通货膨胀预期不确定性存在正向相关关系。这些发现意味着,我国中央银行货币政策滞后效应正在缩短,而为了进一步降低通胀惯性并提高货币政策有效性,引导通货膨胀预期保持稳定是一大途径。     

Optimising Agents, Staggered Wages and Persistence in the Real Effects of Money Shocks

In this paper we incorporate Taylor's (1979) staggered wage setting into an optimising dynamic general equilibrium framework to study whether staggered wages could induce a high degree of persistence in the real effects of money shocks. We conclude that high persistence is an unlikely outcome. Sensible values of the microeconomic parameters and/or a moderate rate of underlying inflation imply a low degree of persistence. Furthermore, once explicit microfoundations are taken into account, we show that: (i) the model is highly non-linear; (ii) the inertia of the system is inversely related to the level of average inflation.     

中国通货膨胀的动态特征研究

现有测度通胀惯性的常用模型是仅含自身滞后因子的自回归模型,该模型不能有效反映通胀预期和波动性对通胀惯性的影响。本文在自回归模型基础上,构建了一个包含通胀惯性、学习型预期和波动性特征的通胀动态模型。该动态模型从均值和波动项两个方面反映了我国通胀水平的动态变化趋势和特征。针对上述模型不能有效反映通胀状态体制变化的缺点,本文还引入Markov机制转换模型来测度我国通胀水平的状态转移特征。利用分位数回归方法下的自回归模型、本文构建的通胀动态模型以及Markov机制转化模型实证研究了我国通胀的动态特征。分析表明:我国通胀水平具有较强的惯性特征;通胀惯性的形成机理比较复杂,学习型预期只能部分解释通胀惯性;通胀水平的状态转移时间比较长;通胀水平与其波动性有着正向的关系。     

The dynamics of inflation: a study of a large number of countries

Over the last twenty years the statistical properties of inflation persistence has been the subject of intense investigation and debate without reaching a unanimous conclusion yet. In this article we attempt to shed further light to this debate using a battery of econometric techniques in order to provide robust evidence on the degree of inflation persistence and whether this has changed during the period in which several countries have followed inflation-targeting regimes or new monetary regimes. We consider the inflation rates of thirty developed and emerging economies using quarterly data for the period 1958 to 2007 which include alternative monetary policy regimes. The coefficient of the inflation parameter is estimated by Ordinary Least Squares (OLS), Autoregressive Moving Average (ARMA) and Autoregressive Fractionally Integrated Moving Average (ARFIMA) models. Furthermore, the grid-bootstrap Median Unbiased (MUB) estimator approach developed by Hansen (1999) is used to estimate the finite sample OLS estimates coupled with the 95% symmetric confidence interval. We also examine parameter stability of persistence coefficients by estimating a model with time-varying parameters.     

Robust monetary policy under model uncertainty and inflation persistence

In this paper, we examine the inflation persistence puzzle by applying the robust control approach of Hansen and Sargent (2008). In line with the literature suggesting that inflation persistence may be affected by the monetary policy design and its institutional characteristics, we find that inflation persistence is positively related to the central bank's preference for model robustness. In effect, model uncertainty and robust decision making may be considered as a mechanism generating inflation persistence, for a given non-zero degree of autocorrelation in supply-side shocks. Further, the policy implication is that the central bank's monetary policy under model uncertainty renders, in terms of the sacrifice ratio, the output-cost of inflation stabilization more important.     

Evaluating inflation persistence considering model uncertainty and structural break

There is little consensus about the historical change in inflation persistence. One of the reasons is that researchers cannot choose a uniform model structure due to model uncertainty. In this study, a model to investigate inflation persistence is proposed. Unlike previous studies, I try to overcome model uncertainty by being agnostic about the structure of the model. Estimation results indicate that inflation has become less persistent over time, implying that inflation persistence is related to the way how monetary policy is conducted.