The U.S. Economic Dynamics and Inflation Persistence: a Regime-Switching Perspective

Elton Beqiraj, Giuseppe Ciccarone and Giovanni Di Bartolomeo ()

No 218, Working Papers in Public Economics from Department of Economics and Law, Sapienza University of Roma

Abstract: This paper revisits the US business cycle accounting for exogenous switches in the inflation intrinsic persistence formalized as changes in the hazard functions. After controlling for Phillips curves shifts, we identify two monetary regimes, leading to a different interpretation from that generally proposed. The Fed operates according to the Brainard Principle by gradually reacting to observed shocks and deviating only episodically to a more active regime. Quantitatively, the main drivers of the business cycle are structural changes in price settings and stochastic volatilities. We also find that structural changes in price and wage adjustments play opposite roles in the Great Inflation. In general, shifts in the Phillips curves are central for correctly understanding the Fed behavior and the business cycle dynamics.

Keywords: duration-dependent wage adjustments; intrinsic inflation persistence; DSGE models; hybrid Phillips curves; Markow-switching (search for similar items in EconPapers)
JEL-codes: E42 E52 E58 (search for similar items in EconPapers)
Pages: 41
Date: 2022-04
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
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