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A Markov-Switching Model of Inflation in Australia

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Author Info
John Simon (Reserve Bank of Australia)

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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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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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Find related papers by JEL classification:
C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
O56 - Economic Development, Technological Change, and Growth - - Economywide Country Studies - - - Oceania

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. Durland, J Michael & McCurdy, Thomas H, 1994. "Duration-Dependent Transitions in a Markov Model of U.S. GNP Growth," Journal of Business & Economic Statistics, American Statistical Association, vol. 12(3), pages 279-88, July.
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  2. 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. [Downloadable!] (restricted)
  3. Nicholas Ricketts & David Rose, . "Inflation, Learning And Monetary Policy Regimes In The G-7 Economies," Working Papers 95-6, Bank of Canada. [Downloadable!]
  4. Martin Evans & Paul Wachtel, 1993. "Inflation regimes and the sources of inflation uncertainty," Proceedings, Federal Reserve Bank of Cleveland, pages 475-520.
  5. Ball, Laurence, 1992. "Why does high inflation raise inflation uncertainty?," Journal of Monetary Economics, Elsevier, vol. 29(3), pages 371-388, June. [Downloadable!] (restricted)
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  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. [Downloadable!] (restricted)
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  7. 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.
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  8. Mishkin, Frederic S & Simon, John, 1995. "An Empirical Examination of the Fisher Effect in Australia," The Economic Record, The Economic Society of Australia, vol. 71(214), pages 217-29, September.
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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. Joseph E. Gagnon, 1997. "Inflation regimes and inflation expectations," International Finance Discussion Papers 581, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  2. Alison Tarditi, 1996. "Modelling the Australian Exchange Rate, Long Bond Yield and Inflationary Expectations," RBA Research Discussion Papers rdp9608, Reserve Bank of Australia. [Downloadable!]
  3. Christian A. Johnson, 2000. "Un Modelo de Switching para el Crecimiento en Chile," Working Papers Central Bank of Chile 84, Central Bank of Chile. [Downloadable!]
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