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Inflation and the Great Moderation: Evidence from a Large Panel Data Set

Author

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  • Georgios Karras

    () (Department of Economics, University of Illinois at Chicago, 601 S. Morgan St., Chicago, IL 60607-7121)

Abstract

This paper investigates the relationship between the Great Moderation and two measures of inflation performance: trend inflation and inflation volatility. Using annual data from 1970 to 2011 for a large panel of 180 developed and developing economies, the results show that, as expected, both measures are positively correlated with output volatility. When the two measures are jointly considered, however, and there is sufficient information to identify their effects separately, our empirical findings show that the effect of inflation volatility is positive, while the effect of trend inflation is negative. The implication is that reduced inflation volatility (holding trend inflation constant) helps stabilize the business cycle, whereas lower inflation (holding inflation volatility constant) exacerbates output volatility.

Suggested Citation

  • Georgios Karras, 2013. "Inflation and the Great Moderation: Evidence from a Large Panel Data Set," International Journal of Business and Economic Sciences Applied Research (IJBESAR), Eastern Macedonia and Thrace Institute of Technology (EMATTECH), Kavala, Greece, vol. 6(3), pages 7-19, December.
  • Handle: RePEc:tei:journl:v:6:y:2013:i:3:p:7-19
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    References listed on IDEAS

    as
    1. Giray Gozgor, 2013. "The New Keynesian Phillips Curve in an Inflation Targeting Country: The Case of Turkey," International Journal of Business and Economic Sciences Applied Research (IJBESAR), Eastern Macedonia and Thrace Institute of Technology (EMATTECH), Kavala, Greece, vol. 6(1), pages 7-18, April.
    2. Vasco Carvalho & Xavier Gabaix, 2013. "The Great Diversification and Its Undoing," American Economic Review, American Economic Association, vol. 103(5), pages 1697-1727, August.
    3. James H. Stock & Mark W. Watson, 2003. "Has the Business Cycle Changed and Why?," NBER Chapters,in: NBER Macroeconomics Annual 2002, Volume 17, pages 159-230 National Bureau of Economic Research, Inc.
    4. Olivier Coibion & Yuriy Gorodnichenko, 2011. "Monetary Policy, Trend Inflation, and the Great Moderation: An Alternative Interpretation," American Economic Review, American Economic Association, vol. 101(1), pages 341-370, February.
    5. Olivier Blanchard & John Simon, 2001. "The Long and Large Decline in U.S. Output Volatility," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 32(1), pages 135-174.
    6. Morten O. Ravn & Harald Uhlig, 2002. "On adjusting the Hodrick-Prescott filter for the frequency of observations," The Review of Economics and Statistics, MIT Press, vol. 84(2), pages 371-375.
    7. Roumen Vesselinov, 2012. "New Composite Indicators for Bulgarian Business Cycle," International Journal of Business and Economic Sciences Applied Research (IJBESAR), Eastern Macedonia and Thrace Institute of Technology (EMATTECH), Kavala, Greece, vol. 5(2), pages 101-111, August.
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    More about this item

    Keywords

    Great Moderation; Trend Inflation; Inflation Volatility;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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