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Does Output Gap, Labor's Share or Unemployment Rate Drive Inflation?

Markku Lanne and Jani Luoto

MPRA Paper from University Library of Munich, Germany

Abstract: We propose a new methodology for ranking in probability the commonly proposed drivers of inflation in the New Keynesian model. The approach is based on Bayesian model selection among restricted VAR models, each of which embodies only one or none of the candidate variables as the driver. Simulation experiments suggest that our procedure is superior to the previously used conventional pairwise Granger causality tests in detecting the true driver. Empirical results lend little support to labor share, output gap or unemployment rate as the driver of U.S. inflation.

Keywords: Inflation; New Keynesian Phillips curve; Bayesian variable selection (search for similar items in EconPapers)
JEL-codes: C11 C32 C52 E31 (search for similar items in EconPapers)
Date: 2012
New Economics Papers: this item is included in nep-ecm and nep-mac
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Journal Article: Does Output Gap, Labour's Share or Unemployment Rate Drive Inflation? (2014) Downloads
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