TY - JOUR
T1 - Changes in U.S. inflation persistence
AU - Kang, Kyu Ho
AU - Kim, Chang-Jin
AU - Morley, James
N1 - Funding Information:
∗We thank the editor, an anonymous referee, Jeremy Piger, and participants at the ESRC Seminar Series on Nonlinear Economics and Finance Research Community 2007 for helpful comments and suggestions. Kim acknowledges financial support from the Korea Research Foundation Grant (KRF-2008-342-B00006) and from the Bryan C. Cressey Professorship at the University of Washington. Morley acknowledges support from the Weidenbaum Center on the Economy, Government, and Public Policy. The usual disclaimers apply.
PY - 2009/7/1
Y1 - 2009/7/1
N2 - We investigate the existence and timing of changes in U.S. inflation persistence. To do so, we develop an unobserved components model of inflation with Markov-switching parameters and we measure persistence using impulse response functions based on the model. An important feature of our model is its allowance for multiple regime shifts in parameters related to the size and propagation of shocks. Inflation persistence depends on the configuration of these parameters, although it need not change even if the parameters change. Using the GDP deflator for the sample period of 1959-2006, we find that U.S. inflation underwent two sudden permanent regime shifts, both of which corresponded to changes in persistence. The first regime shift occurred around the collapse of the Bretton Woods system at the beginning of the 1970's and produced an increase in inflation persistence, while the second regime shift occurred immediately after the Volcker disinflation in the early 1980's and produced a decrease in inflation persistence. Meanwhile, consistent with the New Keynesian Phillips Curve, the gap between inflation and its long-run trend displayed little or no persistence throughout the entire sample period.
AB - We investigate the existence and timing of changes in U.S. inflation persistence. To do so, we develop an unobserved components model of inflation with Markov-switching parameters and we measure persistence using impulse response functions based on the model. An important feature of our model is its allowance for multiple regime shifts in parameters related to the size and propagation of shocks. Inflation persistence depends on the configuration of these parameters, although it need not change even if the parameters change. Using the GDP deflator for the sample period of 1959-2006, we find that U.S. inflation underwent two sudden permanent regime shifts, both of which corresponded to changes in persistence. The first regime shift occurred around the collapse of the Bretton Woods system at the beginning of the 1970's and produced an increase in inflation persistence, while the second regime shift occurred immediately after the Volcker disinflation in the early 1980's and produced a decrease in inflation persistence. Meanwhile, consistent with the New Keynesian Phillips Curve, the gap between inflation and its long-run trend displayed little or no persistence throughout the entire sample period.
KW - Inflation gap
KW - Inflation persistence
KW - Markov switching
KW - New Keynesian Phillips Curve
KW - Unobserved components model
UR - http://www.scopus.com/inward/record.url?scp=70350437807&partnerID=8YFLogxK
U2 - 10.2202/1558-3708.1693
DO - 10.2202/1558-3708.1693
M3 - Article
AN - SCOPUS:70350437807
VL - 13
JO - Studies in Nonlinear Dynamics and Econometrics
JF - Studies in Nonlinear Dynamics and Econometrics
SN - 1081-1826
IS - 4
M1 - 1
ER -