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The U.S. Economic Dynamics and Inflation Persistence: a Regime-Switching Perspective

Author

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  • Elton Beqiraj
  • Giuseppe Ciccarone
  • Giovanni Di Bartolomeo

Abstract

This paper revisits the US business cycle accounting for exogenous switches in the inflation intrinsic persistence formalized as changes in the hazard functions. After controlling for Phillips curves shifts, we identify two monetary regimes, leading to a different interpretation from that generally proposed. The Fed operates according to the Brainard Principle by gradually reacting to observed shocks and deviating only episodically to a more active regime. Quantitatively, the main drivers of the business cycle are structural changes in price settings and stochastic volatilities. We also find that structural changes in price and wage adjustments play opposite roles in the Great Inflation. In general, shifts in the Phillips curves are central for correctly understanding the Fed behavior and the business cycle dynamics.

Suggested Citation

  • Elton Beqiraj & Giuseppe Ciccarone & Giovanni Di Bartolomeo, 2022. "The U.S. Economic Dynamics and Inflation Persistence: a Regime-Switching Perspective," Working Papers in Public Economics 218, Department of Economics and Law, Sapienza University of Roma.
    • Handle: RePEc:sap:wpaper:wp218
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • 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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