A Markov-Switching Model of Inflation: Looking at the future during uncertain times

Barraez, Daniel and Pagliacci, Carolina (2009): A Markov-Switching Model of Inflation: Looking at the future during uncertain times. Published in: Analisis Economico , Vol. XXV, No. 59 (March 2010): pp. 25-46.

Abstract

In this paper, we analyze the dynamic of inflation in Venezuela, in the last eighteen years, through a Markov-switching estimation of a New Keynesian Phillips curve. Estimation is carried out using the EM algorithm. The model’s estimates distinguish between a “normal or backward looking” regime and a “rational expectation” regime consistent with episodes of high uncertainty regarding the performance of the economy. This characterization of regimes is based on two elements: the description of the process of formation of inflationary expectations, and the main economic events occurred during each regime.

• Item Type: MPRA Paper
• Language: English
• Keywords: regime switching, Phillips curve, inflationary expectations
• Subjects: C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D84 - Expectations ; Speculations; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation

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