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U.S. Inflation Dynamics

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Author Info

  • Ravi Balakrishnan
  • Sam Ouliaris

Abstract

This paper aims to improve the understanding of U.S. inflation dynamics by separating out structural from cyclical effects using frequency domain techniques. Most empirical studies of inflation dynamics do not distinguish between secular and cyclical movements, and we show that such a distinction is critical. In particular, we study traditional Phillips curve (TPC) and new Keynesian Phillips curve (NKPC) models of inflation, and conclude that the long-run secular decline in inflation cannot be explained in terms of changes in external trade and global factor markets. These variables tend to impact inflation primarily over the business cycle. We infer that the secular decline in inflation may well reflect improved monetary policy credibility and, thus, maintaining low inflation in the long run is closely linked to anchored inflation expectations.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 06/159.

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Length: 27
Date of creation: 01 Jun 2006
Date of revision:
Handle: RePEc:imf:imfwpa:06/159

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Related research

Keywords: Economic models; inflation; monetary policy; terms of trade; monetary economics; actual inflation; terms of trade shocks; inflation dynamics; gdp deflator; monetary fund; expectations of inflation; rational expectations; low inflation; money supply; inflation process; adaptive expectations; inflation data; wage inflation; real output; moderate inflation; inflationary pressures; inflationary expectations; relative price; inflation targeting; price level; inflation equation; monetary policy rules;

References

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  1. Hodrick, Robert J & Prescott, Edward C, 1997. "Postwar U.S. Business Cycles: An Empirical Investigation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(1), pages 1-16, February.
  2. Marianne Baxter & Robert G. King, 1995. "Measuring Business Cycles Approximate Band-Pass Filters for Economic Time Series," NBER Working Papers 5022, National Bureau of Economic Research, Inc.
  3. Fischer, Stanley, 1977. "Long-Term Contracts, Rational Expectations, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, vol. 85(1), pages 191-205, February.
  4. Don Harding & Adrian Pagan, 2000. "Disecting the Cycle: A Methodological Investigation," Econometric Society World Congress 2000 Contributed Papers 1164, Econometric Society.
  5. Rudebusch, G.D. & Svensson, L.E.O., 1998. "Policy Rules for Inflation Targeting," Papers 637, Stockholm - International Economic Studies.
  6. Hasan Bakhshi & Hashmat Khan & Barbara Rudolf, 2004. "The Phillips curve under state-dependent pricing," Bank of England working papers 227, Bank of England.
  7. Taylor, John B, 1980. "Aggregate Dynamics and Staggered Contracts," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 1-23, February.
  8. Timothy Cogley & Argia M. Sbordone, 2005. "A search for a structural Phillips curve," Staff Reports 203, Federal Reserve Bank of New York.
  9. Rudolf, B. & Bakhshi, H., 2005. "The Phillips Curve Under State-Dependent Pricing," Computing in Economics and Finance 2005 68, Society for Computational Economics.
  10. Batini, Nicoletta & Jackson, Brian & Nickell, Stephen, 2005. "An open-economy new Keynesian Phillips curve for the U.K," Journal of Monetary Economics, Elsevier, vol. 52(6), pages 1061-1071, September.
  11. Gali, Jordi & Gertler, Mark, 1999. "Inflation dynamics: A structural econometric analysis," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 195-222, October.
  12. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
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Citations

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Cited by:
  1. Ben Hunt, 2007. "U.K. Inflation and Relative Prices Over the Last Decade," IMF Working Papers 07/208, International Monetary Fund.
  2. Mark A. Wynne & Erasmus K. Kersting, 2007. "Openness and inflation," Staff Papers, Federal Reserve Bank of Dallas, issue Apr.
  3. Pataracchia, Beatrice, 2011. "The spectral representation of Markov switching ARMA models," Economics Letters, Elsevier, vol. 112(1), pages 11-15, July.

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