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Estimating trend inflation in a regime-switching Phillips curve

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  • NAKAJIMA, Jouchi

Abstract

This study develops a regime-switching Phillips curve model to estimate trend inflation. Extending the earlier work, we allow trend inflation, the slope of the Phillips curve, and the oil price pass-through rate to follow a regime-switching process. An empirical analysis using Japan’s consumer price index illustrates that including the oil price and its time-varying passthrough rate improves the model’s ability to forecast inflation. The empirical results also show that the obtained trend inflation highly correlates with firms’ inflation expectations.

Suggested Citation

  • NAKAJIMA, Jouchi, 2023. "Estimating trend inflation in a regime-switching Phillips curve," Discussion Paper Series 750, Institute of Economic Research, Hitotsubashi University.
    • Handle: RePEc:hit:hituec:750
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    File URL: https://hermes-ir.lib.hit-u.ac.jp/hermes/ir/re/81441/DP750.pdf
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    References listed on IDEAS

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    1. S. Borağan Aruoba, 2020. "Term Structures of Inflation Expectations and Real Interest Rates," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 38(3), pages 542-553, July.
    2. Jouchi Nakajima, 2011. "Time-Varying Parameter VAR Model with Stochastic Volatility: An Overview of Methodology and Empirical Applications," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 29, pages 107-142, November.
    3. Elmar Mertens, 2016. "Measuring the Level and Uncertainty of Trend Inflation," The Review of Economics and Statistics, MIT Press, vol. 98(5), pages 950-967, December.
    4. Sims, Christopher A. & Waggoner, Daniel F. & Zha, Tao, 2008. "Methods for inference in large multiple-equation Markov-switching models," Journal of Econometrics, Elsevier, vol. 146(2), pages 255-274, October.
    5. Richard K. Crump & Stefano Eusepi & Emanuel Moench, 2016. "The term structure of expectations and bond yields," Staff Reports 775, Federal Reserve Bank of New York.
    6. Toshitaka Sekine, 2006. "Time-varying exchange rate pass-through: experiences of some industrial countries," BIS Working Papers 202, Bank for International Settlements.
    7. Lutz Kilian, 2009. "Not All Oil Price Shocks Are Alike: Disentangling Demand and Supply Shocks in the Crude Oil Market," American Economic Review, American Economic Association, vol. 99(3), pages 1053-1069, June.
    8. Chang‐Jin Kim & Pym Manopimoke & Charles R. Nelson, 2014. "Trend Inflation and the Nature of Structural Breaks in the New Keynesian Phillips Curve," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 46(2-3), pages 253-266, March.
    9. Giorgio E. Primiceri, 2005. "Time Varying Structural Vector Autoregressions and Monetary Policy," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 72(3), pages 821-852.
    10. James M. Nason & Gregor W. Smith, 2008. "The New Keynesian Phillips curve : lessons from single-equation econometric estimation," Economic Quarterly, Federal Reserve Bank of Richmond, vol. 94(Fall), pages 361-395.
    11. Chib, Siddhartha, 1996. "Calculating posterior distributions and modal estimates in Markov mixture models," Journal of Econometrics, Elsevier, vol. 75(1), pages 79-97, November.
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    Cited by:

    1. NAKAJIMA, Jouchi & SUDO, Nao & HOGEN, Yoshihiko & TAKIZUKA, Yasutaka, 2023. "On the estimation of the natural yield curve," Discussion Paper Series 753, Institute of Economic Research, Hitotsubashi University.

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    More about this item

    Keywords

    Inflation expectations; Oil prices; Phillips curve; Regime-switching model; Trend inflation;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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