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Inflation-Gap Persistence in the U.S

Listed author(s):
  • Timothy Cogley
  • Giorgio E. Primiceri
  • Thomas J. Sargent

We use Bayesian methods to estimate two models of post WWII U.S. inflation rates with drifting stochastic volatility and drifting coefficients. One model is univariate, the other a multivariate autoregression. We define the inflation gap as the deviation of inflation from a pure random walk component of inflation and use both of our models to study changes over time in the persistence of the inflation gap measured in terms of short- to medium-term predicability. We present evidence that our measure of the inflation-gap persistence increased until Volcker brought mean inflation down in the early 1980s and that it then fell during the chairmanships of Volcker and Greenspan. Stronger evidence for movements in inflation gap persistence emerges from the VAR than from the univariate model. We interpret these changes in terms of a simple dynamic new Keynesian model that allows us to distinguish altered monetary policy rules and altered private sector parameters.

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File URL: http://www.nber.org/papers/w13749.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13749.

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Date of creation: Jan 2008
Publication status: published as Timothy Cogley & Giorgio E. Primiceri & Thomas J. Sargent, 2010. "Inflation-Gap Persistence in the US," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(1), pages 43-69, January.
Handle: RePEc:nbr:nberwo:13749
Note: EFG ME
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