Inflation-Gap Persistence in the U.S
University of California, Davis - Department of Economics
Giorgio E. Primiceri
Northwestern University - Department of Economics; National Bureau of Economic Research (NBER)
Thomas J. Sargent
New York University (NYU) - Department of Economics, Leonard N. Stern School of Business; National Bureau of Economic Research (NBER)
NBER Working Paper No. w13749
We use Bayesian methods to estimate two models of post WWII U.S. inflation rates with drifting stochastic volatility and drifting coefficients. One model is univariate, the other a multivariate autoregression. We define the inflation gap as the deviation of inflation from a pure random walk component of inflation and use both of our models to study changes over time in the persistence of the inflation gap measured in terms of short- to medium-term predicability. We present evidence that our measure of the inflation-gap persistence increased until Volcker brought mean inflation down in the early 1980s and that it then fell during the chairmanships of Volcker and Greenspan. Stronger evidence for movements in inflation gap persistence emerges from the VAR than from the univariate model. We interpret these changes in terms of a simple dynamic new Keynesian model that allows us to distinguish altered monetary policy rules and altered private sector parameters.
Number of Pages in PDF File: 42working papers series
Date posted: January 24, 2008
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