Title: Changes in Inflation Persistence: Lessons from Estimated Markov-Switching New Keynesian Models ∗
Abstract: This paper assesses the sources that lead to a decline in inflation persistence using estimates from a Markov-Switching New Keynesian (MSNK) model. We consider several variations the MSNK model, where each version allows a different aspect of the model to vary across regimes. One version allows only changes in the monetary regime, whereas the others versions focus on changes in the processes for technology and mark-up shocks. U.S. data favors the model allowing for changes in the monetary rule. Estimates of the probability of being in the different monetary regimes indicate a ‘hawkish’ regime was in place prior to 1970 and after 1985. We show that the population moment describing the serial correlation of inflation is a weighted average of the autocorrelation parameters of the exogenous shocks. Changes in monetary regime then shift weight over these serial correlation parameters. In the estimated MSNK model, a shift to the hawkish monetary regime reduces the weight on the more persistent shocks, so lowers the serial correlation of inflation. Allowing for regime changes in the persistence of the markup shock can also account for changes in inflation persistence, but to a lesser degree than the model allowing for monetary regime change.
Publication Year: 2008
Publication Date: 2008-01-01
Language: en
Type: article
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Cited By Count: 5
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