How have inflation dynamics changed over time? Evidence from the euro area and USA

Sami Oinonen, Maritta Paloviita and Lauri Vilmi

No 6/2013, Bank of Finland Research Discussion Papers from Bank of Finland

Abstract: This paper analyzes euro area and U.S. inflation dynamics since the beginning of the 1990s by estimating New Keynesian hybrid Phillips curves with time-varying parameters. We measure inflation expectations by subjective forecasts from Consensus Economics survey and so do not assume rational expectations. Both rolling regressions and state-space models are employed. The results indicate that in both economic areas the inflation dynamics have steadily become more forward-looking over time. We also provide evidence that the impact of the output gap on inflation has increased in recent years. Overall, diminished inflation persistence emphasizes the role of credible monetary policy in inflation dynamics.

Keywords: inflation; Phillips curve; time-varying parameters; survey expectations (search for similar items in EconPapers)
JEL-codes: C22 C51 E31 (search for similar items in EconPapers)
Date: 2013
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bofrdp:rdp2013_006

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