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UK Inflation Persistence: Policy or Nature?

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Author Info
Minford, Patrick () (Cardiff Business School)
Sofat, Prakriti
Nowell, Eric
Srinivasan, Naveen

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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.

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Paper provided by Cardiff University, Cardiff Business School, Economics Section in its series Cardiff Economics Working Papers with number E2005/1.

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Length: 49 pages
Date of creation: Nov 2005
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Handle: RePEc:cdf:wpaper:2005/1

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  1. Patrick Minford & David Meenagh & Jiang Wang, 2006. " Testing a Simple Structural Model of Endogenous Growth," CDMA Conference Paper Series 0606, Centre for Dynamic Macroeconomic Analysis. [Downloadable!]
  2. Le, Vo Phuong Mai & Minford, Patrick, 2007. "Calvo Contracts - Optimal Indexation in General Equilibrium," Cardiff Economics Working Papers E2007/8, Cardiff University, Cardiff Business School, Economics Section. [Downloadable!]
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  3. Le, Vo Phuong Mai & Minford, Patrick, 2007. "Optimising Indexation Arrangements under Calvo Contracts and their Implications for Monetary Policy," CEPR Discussion Papers 6325, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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