IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this paper

Inflation, Learning And Monetary Policy Regimes In The G-7 Economies

Listed author(s):
  • Nicholas Ricketts
  • David Rose
Registered author(s):

    In this paper, the authors report estimates of two- and three- state Markov switching models applied to inflation, measured using consumer price indexes, in the G-7 countries. They report tests that show that two-state models are preferred to simple one-state representations of the data, and argue that three-state representations are more satisfactory than two-state representations for some countries. The preferred estimation results usually include a state that features a unit root in its dynamic structure, which concurs with results of direct tests for this property. However, the multistate representation of the data shows that for all G7 countries these quasi-unit-root properties arise primarily from a few brief episodes of history, concentrated in the 1970s and associated with the major oil-price shocks. For all countries there is evidence of progress towards establishing credibility of regimes with stable inflation, and in many countries there is evidence of progress in building credibility of regimes with low inflation. Credibility refers to the ex post probability assigned to the state by the Markov model, which has a large effect on how expectations of future inflation are formed. An interesting contrast arises from the results for the United States and Canada. Whereas in Canada the credibility of a regime with historically low inflation has risen sharply in the last few years, in the United States there has been convergence on a regime with a stable, but historically average, rate of inflation and not on the alternative low-inflation regime. Dans cette etude, les auteurs presentent des estimations de modeles de Markov a changement de regime comportant deux et trois etats pour representer l'inflation, mesuree par les indices des prix a la consommation des pays du groupe des Sept. Les tests effectues revelent que les modeles a deux etats sont superieurs a ceux a etat unique et que, pour certains pays, les modeles a trois etats sont plus attrayants que ceux a deux etats. Les estimations retenues incorporent generalement un etat dont la structure dynamique est caracterisee par une racine unitaire compatible avec les resultats des tests directs de racine unitaire. Toutefois, les modeles a etats multiples indiquent que, pour tous les pays du groupe des Sept, cette propriete, de racine plutot quasi unitaire, resulte principalement de quelques evenements de courte duree, lies aux principaux chocs petroliers, qui sont surtout survenus dans les annees 70. Selon les resultats empiriques, tous les pays progressent vers l'etablissement de regimes credibles d'inflation stable, et de nombreux pays sont en voie d'implanter des regimes credibles de faible inflation. La notion de credibilite renvoie a la probabilite ex post que le modele de Markov attribue a l'etat, laquelle influe beaucoup sur la facon dont les anticipations d'inflation se forment. Un contraste interessant apparait lorsque les resultats obtenus pour les Etats-Unis a cet egard sont compares a ceux qui s'appliquent au Canada. Alors que, au Canada, la credibilite d'un regime de faible inflation s'est considerablement accrue au cours des dernieres annees, on a trouve aux Etats-Unis une convergence vers un regime caracterise par un taux d'inflation stable, mais de niveau habituellement moyen, plutot que le niveau bas du regime de faible inflation.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL:
    Download Restriction: no

    Paper provided by Bank of Canada in its series Staff Working Papers with number 95-6.

    in new window

    Date of creation:
    Handle: RePEc:bca:bocawp:95-6
    Contact details of provider: Postal:
    234 Wellington Street, Ottawa, Ontario, K1A 0G9, Canada

    Phone: 613 782-8845
    Fax: 613 782-8874
    Web page:

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

    in new window

    1. Alain DeSerres & Alain Guay & Pierre St-Amant, 1995. "Estimating and Projecting Potential Output Using Structural VAR Methodology," Macroeconomics 9504003, EconWPA.
    2. Robert A. Amano & Tony S. Wirjanto, "undated". "An Empirical Investigation into Government Spending and Private Sector Behaviour," Staff Working Papers 94-8, Bank of Canada.
    3. Robert A. Amano & Tony S. Wirjanto, "undated". "The Dynamic Behaviour of Canadian Imports and the Linear-Quadratic Model: Evidence Based on the Euler Equation," Staff Working Papers 94-6, Bank of Canada.
    4. Lewis, Karen K, 1989. "Changing Beliefs and Systematic Rational Forecast Errors with Evidence from Foreign Exchange," American Economic Review, American Economic Association, vol. 79(4), pages 621-636, September.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:bca:bocawp:95-6. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.