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CHANGES IN THE INFLATION PROCESS IN CANADA: Evidence and Implications

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  • Doug Hostland

Abstract

The Canadian economy is currently in transition from a period of disinflation to one with a very low and relatively stable inflation rate. Against this background, the author asks whether reduced-form parameters should be expected to be invariant to changes in the inflation process. This raises two empirical issues. The first relates to whether shifts in the Canadian inflation process can be identified over time. It appears so, since casual observation as well as various statistical procedures indicate that there was a unique period from the mid-1950s to the early 1970s when inflation was low and relatively stable. The second issue relates to whether there is evidence that parameter instability corresponds to shifts in the inflation regime. Statistical tests indicate that parameter instability is an important concern in reduced-form models of the inflation process, particularly for the early 1970s. The evidence for Canada suggests that inflation forecasts from reduced-form models may be unreliable in the presence of important changes in the inflation process.

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Bibliographic Info

Paper provided by EconWPA in its series Macroeconomics with number 9508001.

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Length: 42 pages
Date of creation: 04 Aug 1995
Date of revision:
Handle: RePEc:wpa:wuwpma:9508001

Note: 42 printed pages, compressed PostScript file. Other recent Bank of Canada working papers are listed on the last page of this report.
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  7. Hansen, Bruce E., 1992. "Testing for parameter instability in linear models," Journal of Policy Modeling, Elsevier, vol. 14(4), pages 517-533, August.
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Cited by:
  1. Kitov, Ivan, 2007. "Exact prediction of inflation and unemployment in Canada," MPRA Paper 5015, University Library of Munich, Germany.
  2. Jean-François Fillion & André Léonard, 1997. "La courbe de Phillips au Canada : un examen de quelques hypothèses," Working Papers 97-3, Bank of Canada.
  3. Joseph E. Gagnon, 1997. "Inflation Regimes and Inflation Expectations," RBA Research Discussion Papers rdp9701, Reserve Bank of Australia.
  4. Luis Fernando Melo Velandia & Martha MisasA., 2005. "Analisis Delcomportamiento De La Inflacíon Trimestral En Colombia Bajo Cambios De Regimen: Una Evidencia A Traves Del Modelo," BORRADORES DE ECONOMIA 001993, BANCO DE LA REPÚBLICA.
  5. Guy Debelle, 1996. "The Ends of Three Small Inflations: Australia, New Zealand and Canada," Canadian Public Policy, University of Toronto Press, vol. 22(1), pages 56-78, March.
  6. Butler, L, 1996. "The Bank of Canada's New Quarterly Porjection Model Part 4 : A Semi- Structural Method to Estimate Potential Output : Combining Economic Theory with a Time-Series Filter," Technical Reports 77, Bank of Canada.
  7. Luis Fernando Melo & Martha Misas, . "Análisis del Comportamiento de la Inflación Trimestral en Colombia Bajo Cambios de Régimen: Una Evidencia a Través del Modelo: "Switching" de Hamilton," Borradores de Economia 086, Banco de la Republica de Colombia.
  8. Sharon Kozicki & P.A. Tinsley, 2002. "Alternative sources of the lag dynamics of inflation," Research Working Paper RWP 02-12, Federal Reserve Bank of Kansas City.

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