UK Inflation Persistence: Policy or Nature?

51 Pages Posted: 29 Jun 2006

See all articles by Patrick Minford

Patrick Minford

Cardiff University Business School; Centre for Economic Policy Research (CEPR)

Prakriti Sofat

Cardiff University Business School

Naveen Srinivasan

Cardiff University Business School

Eric Nowell

University of Liverpool Management School (ULMS) - Economics Division

Date Written: April 2006

Abstract

A large econometric literature has found that post-war US inflation exhibits very high persistence, approaching that of a random walk process. Given similar evidence for other OECD countries, many macroeconomists have concluded that high inflation persistence is a "stylized fact." The objective of this paper is to show that degree of inflation persistence is not an inherent structural characteristic of an economy, but in fact a function of the stability and transparency of monetary policy regime in place. We begin by estimating univariate processes for inflation across different periods, allowing for structural breaks based on a priori knowledge of the UK economy. Then we examine whether, a rather straightforward model, easily micro-founded in a standard classical set-up can generate the facts such as we find them. We calibrate our structural model for each of the regimes and solve it analytically for the implied persistence in the inflation process. We compare this theoretical prediction with the estimated persistence for each regime. Finally we bootstrap our model to generate pseudo inflation series and check whether the actual persistence coefficients lie within the 95 percent confidence limits implied by the bootstraps. As a robustness exercise we do the same for the Liverpool model.

Keywords: Inflation, bootstraps

JEL Classification: E0

Suggested Citation

Minford, Patrick and Sofat, Prakriti and Srinivasan, Naveen K. and Nowell, Eric, UK Inflation Persistence: Policy or Nature? (April 2006). CEPR Discussion Paper No. 5608. Available at SSRN: https://ssrn.com/abstract=913076

Patrick Minford (Contact Author)

Cardiff University Business School ( email )

Aberconway Building
Colum Drive
Cardiff, CF10 3EU
United Kingdom
+44 29 2087 5728 (Phone)
+44 29 2087 4419 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Prakriti Sofat

Cardiff University Business School ( email )

Aberconway Building
Colum Drive
Cardiff, CF10 3EU
United Kingdom

Naveen K. Srinivasan

Cardiff University Business School ( email )

Colum Drive
Aberconway Building
Cardiff CF10 3EU
United Kingdom
+44 029 2087 6545 (Phone)
+44 029 2087 4419 (Fax)

Eric Nowell

University of Liverpool Management School (ULMS) - Economics Division ( email )

Eleanor Rathbone Building
Bedford Street North
Liverpool L69 7ZA
United Kingdom
+44 15 1794 3058 (Phone)
+44 15 1794 3032 (Fax)

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