How have inflation dynamics changed over time? : Evidence from the euro area and USA

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Title: How have inflation dynamics changed over time? : Evidence from the euro area and USA
Author: Oinonen, Sami ; Paloviita, Maritta ; Vilmi, Lauri
Organization: Bank of Finland
Series: Bank of Finland Research Discussion Papers
Series number: 6/2013
Year of publication: 2013
Publication date: 6.5.2013
Published in: Published in the Scandinavian Journal of Economics, Volume 114, Issue 2, pages 601–628, June 2012
DOI: 10.1111/j.1467-9442.2011.01685.x
Pages: 39 s.
Keywords: inflaatio; USA; euroalue; odotukset; ennusteet; tuotanto; Phillipsin käyrä; tuotantokuilu
JEL: E31; C22; C51
Abstract: This paper analyzes euro area and U.S. inflation dynamics since the beginning of the 1990s by estimating New Keynesian hybrid Phillips curves with time-varying parameters. We measure inflation expectations by subjective forecasts from Consensus Economics survey and so do not assume rational expectations. Both rolling regressions and state-space models are employed. The results indicate that in both economic areas the inflation dynamics have steadily become more forward-looking over time. We also provide evidence that the impact of the output gap on inflation has increased in recent years. Overall, diminished inflation persistence emphasizes the role of credible monetary policy in inflation dynamics. JEL Classification: E31, C22, C51 Key words: inflation, Phillips curve, time-varying parameters, survey expectations

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