Measuring Inflation Persistence: A Structural Time Series Approach

46 Pages Posted: 23 Jun 2005  

Gerdie Everaert

Ghent University-Universiteit Gent - Department of Social Economics

Maarten Dossche

National Bank of Belgium

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Date Written: June 2005

Abstract

Time series estimates of inflation persistence incur an upward bias if shifts in the inflation target of the central bank remain unaccounted for. Using a structural time series approach we measure different sorts of inflation persistence allowing for an unobserved time-varying inflation target. Unobserved components are identified using Kalman filtering and smoothing techniques. Posterior densities of the model parameters and the unobserved components are obtained in a Bayesian framework based on importance sampling. We find that inflation persistence, expressed by the half-life of a shock, can range from 1 quarter in case of a cost-push shock to several years for a shock to long-run inflation expectations or the output gap.

Keywords: Inflation persistence, inflation target, Kalman filter, Bayesian analysis

JEL Classification: C11, C13, C22, C32, E31

Suggested Citation

Everaert, Gerdie and Dossche, Maarten, Measuring Inflation Persistence: A Structural Time Series Approach (June 2005). ECB Working Paper No. 495. Available at SSRN: https://ssrn.com/abstract=726689

Gerdie Everaert (Contact Author)

Ghent University-Universiteit Gent - Department of Social Economics ( email )

Hoveniersberg 24
Gent, 9000
Belgium

Maarten Dossche

National Bank of Belgium ( email )

Brussels, B-1000
Belgium

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