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Estimating United States Phillips Curves With Expectations Consistent With The Statistical Process Of Inflation

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  • Bill Russell
  • Rosen Azad Chowdhury

Abstract

‘Modern’ Phillips curve theories predict inflation is an integrated, or near integrated, process. However, inflation appears bounded above and below in developed economies and so cannot be ‘truly’ integrated and more likely stationary around a shifting mean. If agents believe inflation is integrated as in the ‘modern’ theories then they are making systematic errors concerning the statistical process of inflation. An alternative theory of the Phillips curve is developed that is consistent with the ‘true’ statistical process of inflation. It is demonstrated that United States inflation data is consistent with the alternative theory but not with the existing ‘modern’ theories.

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Bibliographic Info

Paper provided by Economic Studies, University of Dundee in its series Dundee Discussion Papers in Economics with number 265.

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Length: 35 pages
Date of creation: Apr 2012
Date of revision:
Handle: RePEc:dun:dpaper:265

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Keywords: Phillips curve; inflation; structural breaks; GARCH; non-stationary data;

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References

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  1. Jeff Fuhrer & George Moore, 1993. "Inflation persistence," Proceedings, Board of Governors of the Federal Reserve System (U.S.).
  2. Perron, P. & Bai, J., 1995. "Estimating and Testing Linear Models with Multiple Structural Changes," Cahiers de recherche 9552, Universite de Montreal, Departement de sciences economiques.
  3. Bill Russell & Anindya Banerjee & Issam Malki & Natalia Ponomareva, 2011. "A Multiple Break Panel Approach To Estimating United States Phillips Curves," Dundee Discussion Papers in Economics 252, Economic Studies, University of Dundee.
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Cited by:
  1. Bill Russell, 2013. "ARCH and structural breaks in United States inflation," Dundee Discussion Papers in Economics 277, Economic Studies, University of Dundee.
  2. Bill Russell, 2013. "Macroeconomics: science or faith based discipline?," Dundee Discussion Papers in Economics 276, Economic Studies, University of Dundee.

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