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Persistence, excess volatility, and volatility clusters in inflation

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  • Michael T. Owyang

Abstract

This paper presents a single, integrated model to explain the persistence and volatility characteristics of the U.S. inflation time series. Policymaker learning about a Markov-switching natural rate of unemployment in a neoclassical Phillips curve model with time-varying preferences produces inflation persistence, volatility clustering, and mean/variance correlation. The interaction between the policymaker’s preferences and the Phillips curve generates the first and last results. Policymaker learning produces clusters of volatility as the monetary authority resets the learning algorithm whenever a shock to the Phillips curve occurs. Simulations using parameters estimated via Gibbs sampling confirms the theory.

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Bibliographic Info

Article provided by Federal Reserve Bank of St. Louis in its journal Review.

Volume (Year): (2001)
Issue (Month): Nov. ()
Pages: 41-52

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Handle: RePEc:fip:fedlrv:y:2001:i:nov.:p:41-52:n:v.83no.6

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Related research

Keywords: Econometric models ; Inflation (Finance) ; Time-series analysis;

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Cited by:
  1. Ewing, Bradley T. & Seyfried, William L, 2003. "Modeling The Philips Curve: A Time-Varying Volatility Approach," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 3(2).
  2. Michael J. Dueker & Michael T. Owyang & Martin Sola, 2010. "A time-varying threshold STAR model of unemployment and the natural rate," Working Papers 2010-029, Federal Reserve Bank of St. Louis.
  3. Michael T. Owyang & Abbigail Chiodo, 2002. "Duration dependence in monetary policy: international evidence," Working Papers 2002-021, Federal Reserve Bank of St. Louis.
  4. Michael T. Owyang, 2002. "Modeling Volcker as a non-absorbing state: agnostic identification of a Markov-switching VAR," Working Papers 2002-018, Federal Reserve Bank of St. Louis.
  5. George W. Evans & William A. Branch, 2005. "Model Uncertainty and Endogenous Volatility," Computing in Economics and Finance 2005 33, Society for Computational Economics.
  6. Wang, Miao & Wong, M.C. Sunny, 2005. "Learning dynamics in monetary policy: The robustness of an aggressive inflation stabilizing policy," Journal of Macroeconomics, Elsevier, vol. 27(1), pages 143-151, March.

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