Breaks in the mean of inflation - how they happen and what to do with them

Sandrine Corvoisier () and Benoit Mojon ()
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Sandrine Corvoisier: European Central Bank, http://www.ecb.europa.eu/home/html/index.en.html

No 451, Working Paper Series from European Central Bank

Abstract: In most OECD countries, we cannot reject up to three breaks in the mean of inflation: one break in the late 1960’s-early 1970’s, one in the early-mid 1980’s and another break in the early 1990’s. These breaks tend to be associated more often to breaks in the mean of nominal variables than to the one of real variables, which reinforces the view that they are monetary phenomena. We also show that ignoring breaks in the mean of inflation clearly lead to overrate inflation persistence in standard bi-variate models of inflation. The response of inflation to shocks in these models is markedly faster with breaks than without breaks. Finally, controlling for breaks in the mean of inflation weakens the effects on inflation of M3 growth and of the real unit labour cost towards insignificance while the effects of the output gaps on inflation are more robust.

Keywords: Structural breaks; inflation persistence. (search for similar items in EconPapers)
JEL-codes: E31 E52 C32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac and nep-mon
Date: 2005-03
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