Murray, Christian and Nikolsko-Rzhevskyy, Alex and Papell, David (2008): Inflation Persistence and the Taylor Principle.
Download (725kB) | Preview
Although the persistence of inflation is a central concern of macroeconomics, there is no consensus regarding whether or not inflation is stationary or has a unit root. We show that, in the context of a “textbook” macroeconomic model, inflation is stationary if and only if the Taylor rule obeys the Taylor principle, so that the real interest rate is increased when inflation rises above the target inflation rate. We estimate Markov switching models for both inflation and real-time forward looking Taylor rules. Inflation appears to have a unit root for most of the 1967 – 1981 period, and is stationary before 1967 and after 1981. We find that the Fed’s response to inflation is also regime dependent, with both the pre and post-Volcker samples containing monetary regimes where the Fed both did and did not follow the Taylor principle. This contrasts to recent research that suggests the Fed’s response to inflation has been time invariant, and that changes in monetary policy only occurred with respect to the output gap.
|Item Type:||MPRA Paper|
|Original Title:||Inflation Persistence and the Taylor Principle|
|Keywords:||Taylor rule, real-time data, Great inflation, policy regimes, Markov switching|
|Subjects:||E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies|
|Depositing User:||Alex Nikolsko-Rzhevskyy|
|Date Deposited:||03. Nov 2008 11:01|
|Last Modified:||12. Feb 2013 20:12|
Andrews, Donald W. K. "Exactly Median-Unbiased Estimation of First Order Autoregressive/Unit Root Models" Econometrica, Vol. 61, No. 1. (Jan., 1993), pp. 139-165
Bai, Jushan and Ng, Serena (2004) “A PANIC Attack on Unit Roots and Cointegration” Econometrica, April 2004, 1127-1177
Baillie, Richard T, Chung, Ching-Fan, Tieslau, Margie A “Analysing Inflation by the Fractionally Integrated ARFIMA-GARCH Model” Journal of Applied Econometrics, 1996 Issue 1, 23-40
Barsky, R.B. “The Fisher Hypothesis and the Forecastibility and Persistence of Inflation” Journal of Monetary Economics, 19, 3-24
Brunner, Allan D. and Hess, Gregory D. “Are Higher Levels of Inflation Less Predictable? A State-Dependent Conditional Heteroscedasticity Approach” Journal of Business and Economic Statistics, April 1993, Vol. 11, No 2
Clarida, Richard, Gali, Jordy, and Gertler, Mark “Monetary Policy Rules in Practice: Some International Evidence” European Economic Review, Vol. 42 (June 1998): 1033-1067
Culver, Sarah E and Papell, David H “Is There a Unit Root in the Inflation Rate? Evidence from Sequential Break and Panel Data Models” Journal of Applied Econometrics. 1997, Issue: 4 Pages: 435-44
Evans, Martin and Wachtel, Paul “Inflation Regimes and the Sources of Inflation Uncertainty” Journal of Money, Credit and Banking, Vol 25, No. 3 (Aug. 1993), 475-511
Garcia, René “Asymptotic Null Distribution of the Likelihood Ratio Test in Markov Switching Models” Aug. 1998, International Economic Review, Vol. 39, No. 3, 763-788
Greenspan, Alan “Risk and Uncertainty in Monetary Policy” AEA Papers and Proceedings, May 2004
Hall, Robert and Taylor, John (1997) “Macroeconomics”, 5th edition, (New York: WW Norton)
Hamilton, James D “A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle” Econometrica, 1989 Vol. 57 (2).
Hansen B. E. “The Likelihood Ratio Test Under Nonstandard Conditions: Testing the Markov Switching Model of GNP” Journal of Applied Econometrics, Vol. 7, Dec. 1992
Henry, Ólan T. and Shields, Kalvinder “Is There a Unit Root in Inflation?” Journal of Macroeconomics, March 2004, 481-500
Inoue, Atsushi and Kilian, Lutz “How Useful is Bagging in Forecasting Economic Time Series? A Case Study of U.S. CPI Inflation” CEPR Discussion Paper No. 5304, October 2005
Ireland, P. (1999), Does the Time-Consistency Problem Explain the Behavior of Inflation in the United States, Journal of Monetary Economics 44:2, 279–293.
Lahiri, S. N., “Theoretical comparisons of block bootstrap methods” 1999, Annals of Statistics, 27, 386-404
Marriott, F.H.C. and Pope, J.A. “Bias in the Estimation of Autocorrelations” 1954, Biometrics, 41, 390-402
McCulloch, Huston and Stec, Jeffery A. “Proxying Inflation Forecasts With Fuller/Roy-Type Median Unbiased Near Unit Root Coefficient Estimates” Computing in Economics and Finance 2000
Murray, Christian and Charles R. Nelson, “The Great Depression and Output Persistence,” 2002, Journal of Money, Credit and Banking, 34, 1090-1098.
Nelson, Charles R, and Schwert, G William (1977) “Short-Term Interest Rates as Predictors of Inflation: On Testing the Hypothesis That the Real Rate of Interest is Constant”, AER 1977: 3, 478-86
Neusser, Klaus “Testing the long-run implications of the neoclassical growth model” Journal of Monetary Economics. 1991, Issue 1, 3-37
Ng. S., and P. Perron, “Unit Root Tests in ARMA Models with Data-Dependent Methods for the Selection of the Truncation Lag,” Journal of the American Statistical Association 90, (1995), 268-281
Orphanides, Athanasios, “Monetary Policy Rules Based on Real-Time Data.” American Economic Review, September 2001, 91(4), pp. 964-985.
Orphanides, Athanasios, "Activist Stabilization Policy and Inflation: The Taylor Rule in the 1970s" (November 2002). CFS Working Paper No. 2002/15
Rose, Andrew “Is the Real Interest Rate Stable?” Journal of Finance. Volume 43, Issue 5 Pages: 1095-1112
Rudebusch, G.D., “The Uncertain Unit Root in Real GNP,” American Economic Review 83 (1993), 264-72
Shaman, P., and R. Stine (1988), “The bias of autoregressive coefficient estimators,” J. Am. Statist. Assoc., 83, 842-848
Simon, John “A Markov Switching Model of Inflation in Australia” Reserve Bank of Australia, Discussion Paper 9611, Dec. 1996
Sims, Christopher A. and Zha, Tao (2006) "Were There Regime Switches in U.S. Monetary Policy?" American Economic Review, American Economic Association, vol. 96(1), pages 54-81, March.
Stock, James H. and Watson, Mark W., 1999. "Forecasting Inflation," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 293-335
Taylor, John (1979) “Staggered Wage Setting in the Macro Model,” American Economic Review, May, 108-113.
Taylor, John (1993) “Discretion Versus Policy Rules in Practice,” Carnegie-Rochester Conference Series on Public Policy, 39: 195-214.
Taylor, John (1999) “A Historical Analysis of Monetary Policy Rules,” in John Taylor, ed., Monetary Policy Rules, (University of Chicago Press), 319-347.
Vogel , Richard M. and Shallcross, Amy L. “The moving blocks bootstrap versus parametric time series models” Water Resource Research, Vol. 32, No. 6, 1875–1882, June 1996