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Measuring inflation persistence: a structural time series approach

  • Maarten Dossche

    ()

    (National Bank of Belgium, Research Department
    Ghent University, Study Hive for Economic Research and Public Policy Analysis (SHERPPA))

  • Gerdie Everaert

    ()

    (Ghent University, Study Hive for Economic Research and Public Policy Analysis (SHERPPA))

Time series estimates of inflation persistence incur an upward bias if shifts in the inflation target of the central bank remain unaccounted for. Using a structural time series approach we measure different sorts of inflation persistence allowing for an unobserved timevarying inflation target. Unobserved components are identified using Kalman filtering and smoothing techniques. Posterior densities of the model parameters and the unobserved components are obtained in a Bayesian framework based on importance sampling. We find that inflation persistence, expressed by the halflife of a shock, can range from 1 quarter in case of a costpush shock to several years for a shock to longrun inflation expectations or the output gap.

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Paper provided by National Bank of Belgium in its series Working Paper Research with number 70.

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Length: 49 pages
Date of creation: Jun 2005
Handle: RePEc:nbb:reswpp:200506-1
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