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Reaching Inflation Stability

Antonio Moreno ()

No 269, Econometric Society 2004 North American Summer Meetings from Econometric Society

Abstract: Inflation volatility has significantly declined over the last 20 years in the U.S. To find out why, I follow a structural approach. I estimate a complete New Keynesian model which imposes cross-equation restrictions on the time series of inflation, the output gap and the interest rate. I perform counterfactual analysis with two commonly used measures of inflation: Consumer Price Index (CPI) and Gross Domestic Product Deflator (GDPD). While the change in the propagation mechanism of the economy induced most of the CPI volatility drop, it played a smaller role in the reduction of GDPD volatility. Our maximum likelihood estimates imply that the most important factor behind the drop in inflation volatility was the more forward-looking price setting behavior of the 80s and 90s

Keywords: Inflation Volatility; Structural Model; Monetary Policy Rule (search for similar items in EconPapers)
JEL-codes: C32 C62 E32 (search for similar items in EconPapers)
Date: 2004-08-11
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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