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Regime-shifts and post-float inflation dynamics of Australia

  • Karunaratne, Neil Dias
  • Bhar, Ramprasad
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    Australia's inflation rate and inflation uncertainty during the post-float era 1983Q3-2006Q4 have acted as important barometers of Australia's macroeconomic performance. The conceptualization and measurement of the nexus between inflation and inflation uncertainty is subject to complex dynamics. We use the Markov regime switching heteroscedasticity (MRSH) model to capture long-run stochastic trend and short-run noisy components. This allows us to conclude that in post-float Australia the results deviate significantly from the mainstream Friedman paradigm on inflation and its uncertainty. We also critically review the plausibility of rival paradigms e.g. Keynesian-Mundell-Fleming, Friedman-Ball, Cukierman-Meltzer and Holland, explaining this paradoxical behavior. The analyses presented here provide valuable insights to policymakers grappling with the challenge of designing monetary policy to combat the adverse effects of inflation and inflation uncertainty for Australia emerging out of the global financial crisis.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0264999311000885
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    Article provided by Elsevier in its journal Economic Modelling.

    Volume (Year): 28 (2011)
    Issue (Month): 4 (July)
    Pages: 1941-1949

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    Handle: RePEc:eee:ecmode:v:28:y:2011:i:4:p:1941-1949
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30411

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    2. Ball, Laurence, 1992. "Why does high inflation raise inflation uncertainty?," Journal of Monetary Economics, Elsevier, vol. 29(3), pages 371-388, June.
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