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A Markov-Switching Model of Inflation: Looking at the future during uncertain times

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  • Barraez, Daniel
  • Pagliacci, Carolina

Abstract

In this paper, we analyze the dynamic of inflation in Venezuela, in the last eighteen years, through a Markov-switching estimation of a New Keynesian Phillips curve. Estimation is carried out using the EM algorithm. The model’s estimates distinguish between a “normal or backward looking” regime and a “rational expectation” regime consistent with episodes of high uncertainty regarding the performance of the economy. This characterization of regimes is based on two elements: the description of the process of formation of inflationary expectations, and the main economic events occurred during each regime.

Suggested Citation

  • Barraez, Daniel & Pagliacci, Carolina, 2009. "A Markov-Switching Model of Inflation: Looking at the future during uncertain times," MPRA Paper 106550, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:106550
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    File URL: https://mpra.ub.uni-muenchen.de/106550/1/MPRA_paper_106550.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    regime switching; Phillips curve; inflationary expectations;
    All these keywords.

    JEL classification:

    • C2 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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