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A Noncausal Autoregressive Model with Time-Varying Parameters: An Application to U.S. Inflation

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  • Markku Lanne
  • Jani Luoto

Abstract

We propose a noncausal autoregressive model with time-varying parameters, and apply it to U.S. postwar inflation. The model .fits the data well, and the results suggest that inflation persistence follows from future expectations. Persistence has declined in the early 1980.s and slightly increased again in the late 1990.s. Estimates of the new Keynesian Phillips curve indicate that current inflation also depends on past inflation although future expectations dominate. The implied trend inflation estimate evolves smoothly and is well aligned with survey expectations. There is evidence in favor of the variation of trend inflation following from the underlying marginal cost that drives inflation.

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File URL: http://www.diw.de/documents/publikationen/73/diw_01.c.417800.de/dp1285.pdf
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Paper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 1285.

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Length: 39 p.
Date of creation: 2013
Date of revision:
Handle: RePEc:diw:diwwpp:dp1285

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  1. Sahuc, Jean-Guillaume, 2006. "Partial indexation, trend inflation, and the hybrid Phillips curve," Economics Letters, Elsevier, vol. 90(1), pages 42-50, January.
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