IDEAS home Printed from https://ideas.repec.org/p/ecb/ecbwps/2005451.html

Breaks in the mean of inflation: how they happen and what to do with them

Author

Listed:
  • Corvoisier, Sandrine
  • Mojon, Benoît

Abstract

In most OECD countries, we cannot reject up to three breaks in the mean of inflation: one break in the late 1960's-early 1970's, one in the early-mid 1980's and another break in the early 1990's. These breaks tend to be associated more often to breaks in the mean of nominal variables than to the one of real variables, which reinforces the view that they are monetary phenomena. We also show that ignoring breaks in the mean of inflation clearly lead to overrate inflation persistence in standard bi-variate models of inflation. The response of inflation to shocks in these models is markedly faster with breaks than without breaks. Finally, controlling for breaks in the mean of inflation weakens the effects on inflation of M3 growth and of the real unit labour cost towards insignificance while the effects of the output gaps on inflation are more robust. JEL Classification: E31, E52, C32

Suggested Citation

  • Corvoisier, Sandrine & Mojon, Benoît, 2005. "Breaks in the mean of inflation: how they happen and what to do with them," Working Paper Series 451, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:2005451
    Note: 282718
    as

    Download full text from publisher

    File URL: https://www.ecb.europa.eu//pub/pdf/scpwps/ecbwp451.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Beyer, Andreas & Farmer, Roger E. A., 2003. "Identifying the monetary transmission mechanism using structural breaks," Working Paper Series 275, European Central Bank.
    2. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 115(1), pages 147-180.
    3. Benassy, Jean-Pascal, 2004. "Optimal indexation and the cyclical behavior of prices," Economics Letters, Elsevier, vol. 83(1), pages 83-88, April.
    4. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2005. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 113(1), pages 1-45, February.
    5. Laurence M. Ball & Niamh Sheridan, 2004. "Does Inflation Targeting Matter?," NBER Chapters, in: The Inflation-Targeting Debate, pages 249-276, National Bureau of Economic Research, Inc.
    6. Arturo Estrella & Jeffrey C. Fuhrer, 2003. "Monetary Policy Shifts and the Stability of Monetary Policy Models," The Review of Economics and Statistics, MIT Press, vol. 85(1), pages 94-104, February.
    7. Shaghil Ahmed & Andrew Levin & Beth Anne Wilson, 2004. "Recent U.S. Macroeconomic Stability: Good Policies, Good Practices, or Good Luck?," The Review of Economics and Statistics, MIT Press, vol. 86(3), pages 824-832, August.
    8. Luca Benati & George Kapetanios, 2003. "Structural Breaks in Inflation Dynamics," Computing in Economics and Finance 2003 169, Society for Computational Economics.
    9. Altissimo, Filippo & Corradi, Valentina, 2003. "Strong rules for detecting the number of breaks in a time series," Journal of Econometrics, Elsevier, vol. 117(2), pages 207-244, December.
    10. Dias, Daniel A. & Marques, Carlos Robalo, 2010. "Using mean reversion as a measure of persistence," Economic Modelling, Elsevier, vol. 27(1), pages 262-273, January.
    11. Nicoletta Batini, 2006. "Euro area inflation persistence," Empirical Economics, Springer, vol. 31(4), pages 977-1002, November.
    12. Jean Boivin & Marc P. Giannoni, 2006. "Has Monetary Policy Become More Effective?," The Review of Economics and Statistics, MIT Press, vol. 88(3), pages 445-462, August.
    13. Mojon, Benoît & Agresti, Anna Maria, 2001. "Some stylised facts on the euro area business cycle," Working Paper Series 95, European Central Bank.
    14. Kashyap, Anil K. & Mojon, Benoît & Terlizzese, Daniele & Backé, Peter, 2002. "Monetary Transmission in the Euro Area : Where Do We Stand?," Working Paper Series 114, European Central Bank.
    15. Laurence M. Ball, 1997. "Disinflation and the NAIRU," NBER Chapters, in: Reducing Inflation: Motivation and Strategy, pages 167-194, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Angeloni, Ignazio & Kashyap, Anil K. & Mojon, Benoît & Terlizzese, Daniele, 2003. "The output composition puzzle: a difference in the monetary transmission mechanism in the euro area and U.S," Working Paper Series 268, European Central Bank.
    2. Zheng Liu & Daniel F. Waggoner & Tao Zha, 2011. "Sources of macroeconomic fluctuations: A regime‐switching DSGE approach," Quantitative Economics, Econometric Society, vol. 2(2), pages 251-301, July.
    3. Jean Boivin & Marc P. Giannoni & Benoît Mojon, 2009. "How Has the Euro Changed the Monetary Transmission Mechanism?," NBER Chapters, in: NBER Macroeconomics Annual 2008, Volume 23, pages 77-125, National Bureau of Economic Research, Inc.
    4. Cesaroni, Tatiana & Maccini, Louis & Malgarini, Marco, 2011. "Business cycle stylized facts and inventory behaviour: New evidence for the Euro area," International Journal of Production Economics, Elsevier, vol. 133(1), pages 12-24, September.
    5. Jean Boivin & Marc P. Giannoni & Benoît Mojon, 2008. "How Has the Euro Changed the Monetary Transmission?," NBER Working Papers 14190, National Bureau of Economic Research, Inc.
    6. Sylvain Leduc & Keith Sill, 2007. "Monetary Policy, Oil Shocks, and TFP: Accounting for the Decline in U.S. Volatility," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 10(4), pages 595-614, October.
    7. Sanvi Avouyi-Dovi & Julien Matheron, 2007. "Technology Shocks and Monetary Policy: Revisiting the Fed's Performance," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(2-3), pages 471-507, March.
    8. William Martin & Robert Rowthorn, 2004. "Will Stability Last?," CESifo Working Paper Series 1324, CESifo.
    9. Mojon, Benoît, 2008. "When did unsystematic monetary policy have an effect on inflation?," European Economic Review, Elsevier, vol. 52(3), pages 487-497, April.
    10. Marc P. Giannoni & Jean Boivin, 2005. "DSGE Models in a Data-Rich Environment," Computing in Economics and Finance 2005 431, Society for Computational Economics.
    11. Gerko Elena & Sossounov Kirill, 2015. "Trend inflation and monetary policy rules: determinacy analysis in New Keynesian model with capital accumulation," The B.E. Journal of Macroeconomics, De Gruyter, vol. 15(1), pages 413-441, January.
    12. Ana Beatriz Galvão & Liudas Giraitis & George Kapetanios & Katerina Petrova, 2015. "A Bayesian Local Likelihood Method for Modelling Parameter Time Variation in DSGE Models," Working Papers 770, Queen Mary University of London, School of Economics and Finance.
    13. Alice Albonico & Guido Ascari & Qazi Haque, 2024. "The (Ir)Relevance of Rule‐of‐Thumb Consumers for U.S. Business Cycle Fluctuations," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 56(4), pages 769-804, June.
    14. Florio, Anna, 2018. "Nominal anchors and the price puzzle," Journal of Macroeconomics, Elsevier, vol. 58(C), pages 224-237.
    15. Koursaros, Demetris, 2017. "Labor market dynamics when (un)employment is a social norm," Journal of Economic Behavior & Organization, Elsevier, vol. 134(C), pages 96-116.
    16. Smith, A. Lee, 2016. "When does the cost channel pose a challenge to inflation targeting central banks?," European Economic Review, Elsevier, vol. 89(C), pages 471-494.
    17. Liu, Zheng & Waggoner, Daniel F. & Zha, Tao, 2007. "Asymmetric Expectation Effects of Regime Shifts and the Great Moderation," Kiel Working Papers 1357, Kiel Institute for the World Economy.
    18. Kim, Insu, 2009. "Dual Wage Rigidities: Theory and Some Evidence," MPRA Paper 21494, University Library of Munich, Germany, revised Mar 2010.
    19. Efrem Castelnuovo, 2012. "Testing the Structural Interpretation of the Price Puzzle with a Cost-Channel Model," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 74(3), pages 425-452, June.
    20. Benoit Mojon, 2007. "Monetary policy, output composition and the Great Moderation," Working Paper Series WP-07-07, Federal Reserve Bank of Chicago.

    More about this item

    Keywords

    ;
    ;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ecb:ecbwps:2005451. See general information about how to correct material in RePEc.

    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 CitEc recognized a bibliographic reference but did not link an item in RePEc 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Official Publications (email available below). General contact details of provider: https://edirc.repec.org/data/emieude.html .

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

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.