Changes in U.S. Inflation Persistence

Kang Kyu Ho (), Chang-Jin Kim () and James Morley
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Kang Kyu Ho: Washington University in St. Louis

Studies in Nonlinear Dynamics & Econometrics, 2009, vol. 13, issue 4, 23

Abstract: 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.

Date: 2009
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DOI: 10.2202/1558-3708.1693

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