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Breaks in the mean of inflation - how they happen and what to do with them

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Author Info
Sandrine Corvoisier () (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt, Germany)
Benoît Mojon () (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)

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Abstract

In most OECD countries, we cannot reject up to three breaks in the mean of inflation: one break in the late 1960’s-early 1970’s, one in the early-mid 1980’s and another break in the early 1990’s. These breaks tend to be associated more often to breaks in the mean of nominal variables than to the one of real variables, which reinforces the view that they are monetary phenomena. We also show that ignoring breaks in the mean of inflation clearly lead to overrate inflation persistence in standard bi-variate models of inflation. The response of inflation to shocks in these models is markedly faster with breaks than without breaks. Finally, controlling for breaks in the mean of inflation weakens the effects on inflation of M3 growth and of the real unit labour cost towards insignificance while the effects of the output gaps on inflation are more robust.

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Publisher Info
Paper provided by European Central Bank in its series Working Paper Series with number 451.

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Length: 44 pages
Date of creation: Mar 2005
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Handle: RePEc:ecb:ecbwps:20050451

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Related research
Keywords: Structural breaks; inflation persistence.;

Other versions of this item:

Find related papers by JEL classification:
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
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Laurence M. Ball & Niamh Sheridan, 2003. "Does Inflation Targeting Matter?," IMF Working Papers 03/129, International Monetary Fund. [Downloadable!]
    Other versions:
  2. Beyer, Andreas & Farmer, Roger E A, 2003. "Identifying the Monetary Transmission Mechanism Using Structural Breaks," CEPR Discussion Papers 4106, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  3. Stephen G. Cecchetti & Guy Debelle, 2006. "Has the inflation process changed?," Economic Policy, CEPR, CES, MSH, vol. 21(46), pages 311-352, 04. [Downloadable!] (restricted)
    Other versions:
  4. Shaghil Ahmed & Andrew Levin & Beth Anne Wilson, 2004. "Recent U.S. Macroeconomic Stability: Good Policies, Good Practices, or Good Luck?," The Review of Economics and Statistics, MIT Press, vol. 86(3), pages 824-832, 08. [Downloadable!] (restricted)
    Other versions:
  5. Daniel Dias & Carlos Robalo Marques, 2005. "Using mean reversion as a measure of persistence," Working Paper Series 450, European Central Bank. [Downloadable!]
  6. Nicoletta Batini, 2002. "Euro area inflation persistence," Working Paper Series 201, European Central Bank. [Downloadable!]
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  7. Benassy, Jean-Pascal, 2004. "Optimal indexation and the cyclical behavior of prices," Economics Letters, Elsevier, vol. 83(1), pages 83-88, April. [Downloadable!] (restricted)
  8. Timothy Cogley & Thomas Sargent, . "Evolving Post-World War II U.S. Inflation Dynamics," Working Papers 2132872, Department of Economics, W. P. Carey School of Business, Arizona State University. [Downloadable!]
    Other versions:
  9. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules And Macroeconomic Stability: Evidence And Some Theory," The Quarterly Journal of Economics, MIT Press, vol. 115(1), pages 147-180, February. [Downloadable!] (restricted)
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  10. Jean Boivin & Marc P. Giannoni, 2003. "Has Monetary Policy Become More Effective?," NBER Working Papers 9459, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  11. Luca Benati & George Kapetanios, 2003. "Structural Breaks in Inflation Dynamics," Computing in Economics and Finance 2003 169, Society for Computational Economics.
  12. Arturo Estrella & Jeffrey C. Fuhrer, 2003. "Monetary Policy Shifts and the Stability of Monetary Policy Models," The Review of Economics and Statistics, MIT Press, vol. 85(1), pages 94-104, 01. [Downloadable!] (restricted)
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  14. Altissimo, Filippo & Corradi, Valentina, 2003. "Strong rules for detecting the number of breaks in a time series," Journal of Econometrics, Elsevier, vol. 117(2), pages 207-244, December. [Downloadable!] (restricted)
  15. Anna Maria Agresti & Benoit Mojon, 2001. "Some stylised facts on the Euro area business cycle," Working Paper Series 095, European Central Bank. [Downloadable!]
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Chien-Chiang Lee & Chun-Ping Chang, 2007. "Mean reversion of inflation rates in 19 OECD countries: Evidence from panel Lm unit root tests with structural breaks," Economics Bulletin, Economics Bulletin, vol. 3(23), pages 1-15. [Downloadable!]
  2. Sandra Eickmeier & Katharina Moll, 2009. "The global dimension of inflation - evidence from factor-augmented Phillips curves," Working Paper Series 1011, European Central Bank. [Downloadable!]
  3. Filippo Altissimo & Benoît Mojon & Paolo Zaffaroni, 2007. "Fast micro und slow macro: can aggregation explain the persistence of inflation?," Working Paper Series 729, European Central Bank. [Downloadable!]
    Other versions:
  4. Matteo Ciccarelli & Benoît Mojon, 2005. "Global inflation," Working Paper Series 537, European Central Bank. [Downloadable!]
    Other versions:
  5. Gianni Amisano & Oreste Tristani, 2007. "Euro area inflation persistence in an estimated nonlinear DSGE model," Working Paper Series 754, European Central Bank. [Downloadable!]
    Other versions:
  6. Eijffinger, Sylvester C W & Hoogduin, Lex & van der Cruijsen, Carin A B, 2008. "Optimal Central Bank Transparency," CEPR Discussion Papers 6889, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  7. Willert, Juliane, 2009. "Mean Shift detection under long-range dependencies with ART," MPRA Paper 17874, University Library of Munich, Germany. [Downloadable!]
  8. Julia Lendvai, 2006. "Inflation dynamics and regime shifts," Working Paper Series 684, European Central Bank. [Downloadable!]
  9. Alessandro Calza, 2008. "Globalisation, domestic inflation and global output gaps - evidence from the euro area," Working Paper Series 890, European Central Bank. [Downloadable!]
  10. Benoît Mojon, 2005. "When did unsystematic monetary policy have an effect on inflation?," Working Paper Series 559, European Central Bank. [Downloadable!]
    Other versions:
  11. Laurent Bilke, 2005. "Break in the mean and persistence of inflation - a sectoral analysis of French CPI," Working Paper Series 463, European Central Bank. [Downloadable!]
  12. Alessandro Calza, 2008. "Globalisation, domestic inflation and the global output gaps: evidence from the Euro era," Globalization and Monetary Policy Institute Working Paper 13, Federal Reserve Bank of Dallas. [Downloadable!]
  13. Alberto Musso & Livio Stracca & Dick van Dijk, 2007. "Instability and nonlinearity in the Euro area Phillips curve," Working Paper Series 811, European Central Bank. [Downloadable!]
    Other versions:
  14. Luca Benati & Haroon Mumtaz, 2007. "U.S. evolving macroeconomic dynamics - a structural investigation," Working Paper Series 746, European Central Bank. [Downloadable!]
  15. Craig S. Hakkio, 2009. "Global inflation dynamics," Research Working Paper RWP 09-01, Federal Reserve Bank of Kansas City. [Downloadable!]
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