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Reaching Inflation Stability

  • Antonio Moreno


    (School of Economics and Business Administration, University of Navarra)

Inflation volatility has significantly declined over the last 20 years in the U.S. To find out why, I follow a structural approach. I estimate a complete New Keynesian model which imposes cross-equation restrictions on the time series of inflation, the output gap and the interest rate. I perform counterfactual analysis with the most commonly used measures of inflation: Consumer Price Index (CPI) and Gross Domestic Product Deflator (GDPD). While the change in the propagation mechanism of the economy induced most of the CPI volatility drop, it played a smaller role in the reduction of GDPD volatility. Our maximum likelihood estimates imply that the most important factor behind the drop in inflation volatility was the more forward-looking price setting behavior of the 80s and 90s.

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Paper provided by School of Economics and Business Administration, University of Navarra in its series Faculty Working Papers with number 13/03.

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Length: 56 pages
Date of creation: 01 Nov 2003
Date of revision:
Publication status: Forthcoming, Journal of Money, Credit and Banking
Handle: RePEc:una:unccee:wp1303
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