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A Markov-switching Model of Inflation in Australia

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  • John Simon

    (Reserve Bank of Australia)

Abstract

This paper applies the methodology of Markov-switching models to describe the inflation process in Australia in the period since the early 1960s. In contrast to conventional modelling, the approach makes explicit allowance for the possibility of structural change: inflation is modelled within a framework that allows endogenous switching between simple inflation equations. The approach may be relevant to understanding shifts in inflation expectations if the public also uses relatively simple forecasting rules in formulating expectations. The results suggest that inflation is reasonably well represented by relatively simple functions of past inflation and an output gap term, with major regime changes occurring in the early 1970s and early 1990s.

Suggested Citation

  • John Simon, 1996. "A Markov-switching Model of Inflation in Australia," RBA Research Discussion Papers rdp9611, Reserve Bank of Australia.
    • Handle: RePEc:rba:rbardp:rdp9611
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    File URL: https://www.rba.gov.au/publications/rdp/1996/pdf/rdp9611.pdf
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    References listed on IDEAS

    as
    1. de Brouwer, Gordon & Ericsson, Neil R, 1998. "Modeling Inflation in Australia," Journal of Business & Economic Statistics, American Statistical Association, vol. 16(4), pages 433-449, October.
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    7. Taylor, John B., 1981. "On the relation between the variability of inflation and the average inflation rate," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 15(1), pages 57-85, January.
    8. Ball, Laurence, 1992. "Why does high inflation raise inflation uncertainty?," Journal of Monetary Economics, Elsevier, vol. 29(3), pages 371-388, June.
    9. Martin Evans & Paul Wachtel, 1993. "Inflation regimes and the sources of inflation uncertainty," Proceedings, Federal Reserve Bank of Cleveland, pages 475-520.
    10. Hamilton, James D. & Susmel, Raul, 1994. "Autoregressive conditional heteroskedasticity and changes in regime," Journal of Econometrics, Elsevier, vol. 64(1-2), pages 307-333.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Joseph E. Gagnon, 2008. "Inflation regimes and inflation expectations," Review, Federal Reserve Bank of St. Louis, vol. 90(May), pages 229-243.
    2. Neil Dias Karunaratne & Ramprasad Bhar, 2010. "Regime-Shifts & Post-Float Inflation Dynamics In Australia," Discussion Papers Series 405, School of Economics, University of Queensland, Australia.
    3. Just, Małgorzata & Echaust, Krzysztof, 2020. "Stock market returns, volatility, correlation and liquidity during the COVID-19 crisis: Evidence from the Markov switching approach," Finance Research Letters, Elsevier, vol. 37(C).
    4. Alison Tarditi, 1996. "Modelling the Australian Exchange Rate, Long Bond Yield and Inflationary Expectations," RBA Research Discussion Papers rdp9608, Reserve Bank of Australia.
    5. Piotr Białowolski & Dawid Żochowski & Piotr Zwiernik, 2011. "Modelling Inflation Using Markov Switching Models: Case of Poland, 1992 – 2005," Prace i Materiały, Instytut Rozwoju Gospodarczego (SGH), vol. 86(2), pages 185-199, January.
    6. Vugar Ahmadov & Shaig Adigozalov & Salman Huseynov & Fuad Mammadov & Vugar Rahimov, 2016. "Forecasting inflation in post-oil boom years: A case for non-linear models?," Working Papers 1601, Central Bank of Azerbaijan Republic.
    7. Bilgili, Faik & Tülüce, Nadide Sevil Halıcı & Doğan, İbrahim, 2012. "The determinants of FDI in Turkey: A Markov Regime-Switching approach," Economic Modelling, Elsevier, vol. 29(4), pages 1161-1169.
    8. repec:wsd:irgpim:v:86:y:2011:i:1:p:185-199 is not listed on IDEAS
    9. Barsoum, Fady & Stankiewicz, Sandra, 2015. "Forecasting GDP growth using mixed-frequency models with switching regimes," International Journal of Forecasting, Elsevier, vol. 31(1), pages 33-50.
    10. Besso, Christophe Raoul, 2010. "Phillips Curve, case study in Cameroon: evaluation of fundamental assumptions," MPRA Paper 35614, University Library of Munich, Germany, revised 28 Dec 2011.
    11. Alexandra Krystalogianni & Sotiris Tsolacos, 2005. "Regime switching in yield structures and real estate investment," Journal of Property Research, Taylor & Francis Journals, vol. 21(4), pages 279-299, May.
    12. Christopher CRUZ & Claire MAPA, 2013. "An Early Warning System For Inflation In The Philippines Using Markov-Switching And Logistic Regression Models," Theoretical and Practical Research in the Economic Fields, ASERS Publishing, vol. 4(2), pages 136-150.
    13. Barraez, Daniel & Pagliacci, Carolina, 2009. "A Markov-Switching Model of Inflation: Looking at the future during uncertain times," MPRA Paper 106550, University Library of Munich, Germany.
    14. Egan, Paul & McQuinn, Kieran, 2023. "Regime switching and the responsiveness of prices to supply: The case of the Irish housing market," The Quarterly Review of Economics and Finance, Elsevier, vol. 87(C), pages 82-94.
    15. Lupu, Dan & Asandului, Mircea & Sîrghi, Nicoleta, 2015. "Considerations regarding inflation's evolution in Central and Eastern European countries," MPRA Paper 95508, University Library of Munich, Germany.
    16. Yucel, Eray, 2011. "A Review and Bibliography of Early Warning Models," MPRA Paper 32893, University Library of Munich, Germany.
    17. Philippe Burger, 2014. "Inflation and Market Uncertainty in South Africa," South African Journal of Economics, Economic Society of South Africa, vol. 82(4), pages 583-602, December.

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    More about this item

    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
    • O56 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Oceania

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