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Inflation-Gap Persistence in the US

  • Timothy Cogley
  • Giorgio E. Primiceri
  • Thomas J. Sargent

We estimate vector autoregressions with drifting coefficients and stochastic volatility to investigate whether US inflation persistence has changed. We focus on the inflation gap, defined as the difference between inflation and trend inflation, and we measure persistence in terms of short- to medium-term predictability. We present evidence that inflation-gap persistence increased during the Great Inflation and that it fell after the Volcker disinflation. We interpret these changes using a dynamic new Keynesian model that highlights the importance of changes in the central bank's inflation target. (JEL E12, E31, E52, E58)

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Article provided by American Economic Association in its journal American Economic Journal: Macroeconomics.

Volume (Year): 2 (2010)
Issue (Month): 1 (January)
Pages: 43-69

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Handle: RePEc:aea:aejmac:v:2:y:2010:i:1:p:43-69
Note: DOI: 10.1257/mac.2.1.43
Contact details of provider: Web page: https://www.aeaweb.org/aej-macro
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  1. Barsky, Robert B., 1987. "The Fisher hypothesis and the forecastability and persistence of inflation," Journal of Monetary Economics, Elsevier, vol. 19(1), pages 3-24, January.
  2. Cogley, Timothy & Sargent, Thomas J., 2005. "The conquest of U.S. inflation: learning and robustness to model uncertainty," Working Paper Series 0478, European Central Bank.
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  12. Frank Smets & Raf Wouters, 2003. "An Estimated Dynamic Stochastic General Equilibrium Model of the Euro Area," Journal of the European Economic Association, MIT Press, vol. 1(5), pages 1123-1175, 09.
  13. Beyer, Andreas & Farmer, Roger E. A., 2003. "On the indeterminacy of determinacy and indeterminacy," Working Paper Series 0277, European Central Bank.
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  17. Timothy Cogley & Thomas Sargent, . "Evolving Post-World War II U.S. Inflation Dynamics," Working Papers 2132872, Department of Economics, W. P. Carey School of Business, Arizona State University.
  18. Christopher A. Sims & Tao Zha, 1999. "Error Bands for Impulse Responses," Econometrica, Econometric Society, vol. 67(5), pages 1113-1156, September.
  19. Timothy Cogley & Thomas J. Sargent, 2005. "Drift and Volatilities: Monetary Policies and Outcomes in the Post WWII U.S," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(2), pages 262-302, April.
  20. Del Negro, Marco & Schorfheide, Frank & Smets, Frank & Wouters, Rafael, 2005. "On the Fit and Forecasting Performance of New Keynesian Models," CEPR Discussion Papers 4848, C.E.P.R. Discussion Papers.
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  28. Timothy Cogley & Argia M. Sbordone, 2006. "Trend inflation and inflation persistence in the New Keynesian Phillips curve," Staff Reports 270, Federal Reserve Bank of New York.
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