Reaching Inflation Stability

Moreno, Antonio

Reaching Inflation Stability

No 13/03, Faculty Working Papers from School of Economics and Business Administration, University of Navarra

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 the most 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.

JEL-codes: C32 C62 E32 E52 (search for similar items in EconPapers)
Pages: 56 pages
Date: 2003-11-01
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Citations: View citations in EconPapers (10)

Forthcoming, Journal of Money, Credit and Banking

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Working Paper: Reaching Inflation Stability (2004)
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