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Unemployment and Inflation Regimes

Author

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  • Warne Anders

    (European Central Bank)

  • Vredin Anders

    (Sveriges Riksbank)

Abstract

In this paper we study 2-state Markov switching VAR models of monthly unemployment and inflation for three countries: Sweden, United Kingdom, and the United States. The primary purpose is to examine if periods of low inflation are associated with high or low unemployment volatility. To interpret the regimes the empirical results are compared with the predictions from a version of Rogoff's (1985) model of monetary policy. Our version is consistent with equilibrium unemployment and has the realistic feature of allowing both variables to be persistent. We find that both the theoretical and the empirical results suggest that an increase in central bank "conservativeness" can be associated with either a higher or a lower variance in unemployment. In the U.S. case we find that the variance of unemployment is lower in the low inflation regime than in the high inflation regime, while the Swedish and the U.K. cases suggest that unemployment variability is higher in the low inflation regime.

Suggested Citation

  • Warne Anders & Vredin Anders, 2006. "Unemployment and Inflation Regimes," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 10(2), pages 1-52, May.
    • Handle: RePEc:bpj:sndecm:v:10:y:2006:i:2:n:2
    DOI: 10.2202/1558-3708.1280
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    Cited by:

    1. Demertzis, Maria & Hughes Hallett, Andrew, 2007. "Central Bank transparency in theory and practice," Journal of Macroeconomics, Elsevier, vol. 29(4), pages 760-789, December.
    2. Touny, Mahmoud, 2013. "Investigate the Long-Run Trade-Off between Inflation and Unemployment in Egypt," MPRA Paper 54561, University Library of Munich, Germany.
    3. Siem Jan Koopman & Marius Ooms & Irma Hindrayanto, 2009. "Periodic Unobserved Cycles in Seasonal Time Series with an Application to US Unemployment," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 71(5), pages 683-713, October.
    4. Ahdi Ajmi & Adnen Ben Nasr & Mohamed Boutahar, 2008. "Seasonal Nonlinear Long Memory Model for the US Inflation Rates," Computational Economics, Springer;Society for Computational Economics, vol. 31(3), pages 243-254, April.
    5. Warne Anders & Vredin Anders, 2006. "Unemployment and Inflation Regimes," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 10(2), pages 1-52, May.
    6. Hindrayanto, Irma & Koopman, Siem Jan & Ooms, Marius, 2010. "Exact maximum likelihood estimation for non-stationary periodic time series models," Computational Statistics & Data Analysis, Elsevier, vol. 54(11), pages 2641-2654, November.
    7. Mohammad Naim Azimi, 2016. "Drawing on Phillips curve: does the inverse relation between inflation and unemployment persist in transitional economies," International Journal of Economics and Accounting, Inderscience Enterprises Ltd, vol. 7(2), pages 89-100.
    8. Charles S. Bos & Siem Jan Koopman & Marius Ooms, 2007. "Long memory modelling of inflation with stochastic variance and structural breaks," CREATES Research Papers 2007-44, Department of Economics and Business Economics, Aarhus University.
    9. Maria Demertzis & Nicola Viegi, 2006. "Aiming for the Bull's Eye: Uncertainty and Inertia in Monetary Policy," Computing in Economics and Finance 2006 150, Society for Computational Economics.
    10. Chinhui Juhn & Simon Potter & Marcelle Chauvet, 2002. "Markov switching in disaggregate unemployment rates," Empirical Economics, Springer, vol. 27(2), pages 205-232.

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    More about this item

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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