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A Markov-switching Model of Inflation in Australia

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  • John Simon

    (Reserve Bank of Australia)

Abstract

This paper applies the methodology of Markov-switching models to describe the inflation process in Australia in the period since the early 1960s. In contrast to conventional modelling, the approach makes explicit allowance for the possibility of structural change: inflation is modelled within a framework that allows endogenous switching between simple inflation equations. The approach may be relevant to understanding shifts in inflation expectations if the public also uses relatively simple forecasting rules in formulating expectations. The results suggest that inflation is reasonably well represented by relatively simple functions of past inflation and an output gap term, with major regime changes occurring in the early 1970s and early 1990s.

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File URL: http://www.rba.gov.au/publications/rdp/1996/pdf/rdp9611.pdf
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Bibliographic Info

Paper provided by Reserve Bank of Australia in its series RBA Research Discussion Papers with number rdp9611.

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Date of creation: Dec 1996
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Handle: RePEc:rba:rbardp:rdp9611

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Cited by:
  1. Neil Dias Karunaratne & Ramprasad Bhar, 2010. "Regime-Shifts & Post-Float Inflation Dynamics In Australia," Discussion Papers Series 405, School of Economics, University of Queensland, Australia.
  2. Besso, Christophe Raoul, 2010. "Phillips Curve, case study in Cameroon: evaluation of fundamental assumptions," MPRA Paper 35614, University Library of Munich, Germany, revised 28 Dec 2011.

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