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Breaks and the Statistical Process of Inflation: The Case of the ‘Modern’ Phillips Curve

Bill Russell () and Dooruj Rambaccussing ()

No 294, Dundee Discussion Papers in Economics from Economic Studies, University of Dundee

Abstract: ‘Modern’ theories of the Phillips curve inadvertently imply that inflation is an integrated or near integrated process but this implication is strongly rejected using United States data. However, if we assume that inflation is a stationary process around a shifting mean (due to changes in monetary policy) then any estimate of long-run relationships will suffer from a ‘small-sample’ problem as there are too few inflation ‘regimes’ where the data are stationary. We offer a ‘4-stage’ solution to this problem and applying this solution to United States data we estimate a significant negative sloping non-linear long-run Phillips curve.

Keywords: Phillips curve; inflation; structural breaks; non-stationary data (search for similar items in EconPapers)
JEL-codes: C23 E31 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2016-02
New Economics Papers: this item is included in nep-mac
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