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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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References

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  1. Laurence Ball, 1990. "Why Does High Inflation Raise Inflation Uncertainty?," NBER Working Papers 3224, National Bureau of Economic Research, Inc.
  2. Perron, P., 1989. "Testing For A Unit Root In A Time Series With A Changing Mean," Papers 347, Princeton, Department of Economics - Econometric Research Program.
  3. de Brouwer, Gordon & Ericsson, Neil R, 1998. "Modeling Inflation in Australia," Journal of Business & Economic Statistics, American Statistical Association, vol. 16(4), pages 433-49, October.
  4. Hamilton, James D., 1990. "Analysis of time series subject to changes in regime," Journal of Econometrics, Elsevier, vol. 45(1-2), pages 39-70.
  5. Hansen, Bruce E, 1992. "The Likelihood Ratio Test under Nonstandard Conditions: Testing the Markov Switching Model of GNP," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 7(S), pages S61-82, Suppl. De.
  6. Hamilton, James D. & Susmel, Raul, 1994. "Autoregressive conditional heteroskedasticity and changes in regime," Journal of Econometrics, Elsevier, vol. 64(1-2), pages 307-333.
  7. Martin Evans & Paul Wachtel, 1993. "Inflation regimes and the sources of inflation uncertainty," Proceedings, Federal Reserve Bank of Cleveland, pages 475-520.
  8. Taylor, John B., 1981. "On the relation between the variability of inflation and the average inflation rate," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 15(1), pages 57-85, January.
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Cited by:
  1. Alison Tarditi, 1996. "Modelling the Australian Exchange Rate, Long Bond Yield and Inflationary Expectations," RBA Research Discussion Papers rdp9608, Reserve Bank of Australia.
  2. Joseph E. Gagnon, 2008. "Inflation regimes and inflation expectations," Review, Federal Reserve Bank of St. Louis, issue May, pages 229-243.
  3. 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.
  4. Yucel, Eray, 2011. "A Review and Bibliography of Early Warning Models," MPRA Paper 32893, University Library of Munich, Germany.
  5. 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.
  6. repec:wsd:irgpim:v:86:y:2011:i:1:p:185-199 is not listed on IDEAS
  7. Fady Barsoum & Sandra Stankiewicz, 2013. "Forecasting GDP Growth Using Mixed-Frequency Models With Switching Regimes," Working Paper Series of the Department of Economics, University of Konstanz 2013-10, Department of Economics, University of Konstanz.

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