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Instability in U.S. inflation: 1967-2005

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  • James M. Nason

Abstract

Maintaining stables prices and keeping inflation in check have become key policy objectives of the Federal Reserve and other central banks. Evidence indicates that inflation has become less persistent and volatile since the early 1980s. Although economists have examined the implications for inflation modeling and forecasting, little information exists about whether changes or instabilities in inflation dynamics coincide with specific economic events such as oil price shocks or recessions. ; This article studies U.S. monthly inflation, inflation growth, and price level dynamics from January 1967 to September 2005. The author employs four price level measures—two versions of the monthly consumer price index and two versions of the monthly personal consumption expenditure deflator—with the goal of identifying possible instabilities in these dynamics. ; Autoregressive, moving average, and unobserved components models provide estimates on various aspects of inflation and price levels. Two rolling samples spanning the 1967–2005 period are constructed to uncover evidence about possible instability in mean inflation and the persistence and volatility of inflation and inflation growth. ; One way to summarize the empirical results is that this instability coincides with different economic events such as the oil price shocks of the 1970s or the end of the 1990–91 recession. An unresolved question is whether such changes are one-time events or can be expected to be repeated systematically in the future.

Suggested Citation

  • James M. Nason, 2006. "Instability in U.S. inflation: 1967-2005," Economic Review, Federal Reserve Bank of Atlanta, issue Q 2, pages 39-59.
  • Handle: RePEc:fip:fedaer:y:2006:i:q2:p:39-59:n:v.91no.2
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    References listed on IDEAS

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    1. Brock, William A. & Durlauf, Steven N. & West, Kenneth D., 2007. "Model uncertainty and policy evaluation: Some theory and empirics," Journal of Econometrics, Elsevier, vol. 136(2), pages 629-664, February.
    2. Andrews, Donald W K, 1993. "Tests for Parameter Instability and Structural Change with Unknown Change Point," Econometrica, Econometric Society, vol. 61(4), pages 821-856, July.
    3. Hansen, Bruce E, 1997. "Approximate Asymptotic P Values for Structural-Change Tests," Journal of Business & Economic Statistics, American Statistical Association, vol. 15(1), pages 60-67, January.
    4. Brock, William A, 1974. "Money and Growth: The Case of Long Run Perfect Foresight," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 15(3), pages 750-777, October.
    5. Jonas D. M. Fisher & Chin Te Liu & Ruilin Zhou, 2002. "When can we forecast inflation?," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q I, pages 32-44.
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    Cited by:

    1. Mark Bils & Peter J. Klenow & Benjamin A. Malin, 2012. "Reset Price Inflation and the Impact of Monetary Policy Shocks," American Economic Review, American Economic Association, vol. 102(6), pages 2798-2825, October.
    2. James M. Nason & Gregor W. Smith, 2013. "Reverse Kalman filtering U.S. inflation with sticky professional forecasts," Working Papers 13-34, Federal Reserve Bank of Philadelphia.
    3. repec:zbw:espost:171324 is not listed on IDEAS
    4. Altansukh, Gantungalag & Becker, Ralf & Bratsiotis, George J. & Osborn, Denise R., 2017. "What is the Globalisation of Inflation?," EconStor Open Access Articles, ZBW - German National Library of Economics, pages 1-27.
    5. Gbaguidi, David Sedo, 2011. "Expectations Impact on the Effectiveness of the Inflation-Real Activity Trade-Off," MPRA Paper 35482, University Library of Munich, Germany.
    6. Gbaguidi, David Sedo, 2011. "Regime Switching in a New Keynesian Phillips Curve with Non-zero Steady-state Inflation Rate," MPRA Paper 35481, University Library of Munich, Germany.
    7. Charles S. Bos & Siem Jan Koopman & Marius Ooms, 2007. "Long memory modelling of inflation with stochastic variance and structural breaks," CREATES Research Papers 2007-44, Department of Economics and Business Economics, Aarhus University.

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    Keywords

    Inflation (Finance);

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