Inflation expectations and regime shifts in the euro area

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Title: Inflation expectations and regime shifts in the euro area
ISBN: 952-462-243-2
Author: Virén, Matti
Organization: Suomen Pankki
Series: Bank of Finland Research Discussion Papers
ISSN: 1456-6184
Series year: 2005
Series number: 25/2005
Year of publication: 2005
Publication date: 1.9.2005
Published in: Published in Principles of Modelling, Forecasting and Decision-making, Volume 1 (2007), Number 4, 127-142
Pages: 23 s.
Keywords: euroalue; inflaatio; odotukset; EMU;
JEL: E32; E37
Abstract: This paper focuses on the determination of inflation expectations. The following two questions are examined: How much do inflation expectations reflect different economic and institutional regime shifts and in which way do inflation expectations adjust to past inflation?The basic idea in the analysis is an assumption that inflation expectations do not mechanically reflect past inflation as may econometric specification de facto assume but rather they depend on the relevant economic regime.Also the adjustment of expectations to past inflation is different in different inflation regimes.The regime analysis is based on panel data from EMU/EU countries for the period 1973- 2004, while the inflation adjustment analysis mainly uses the Kalman filter technique for individual countries for the same period.Expectations (forecasts) are derived from OECD data.Empirical results strongly favour the regime-sensitivity hypothesis and provide an explanation for the poor performance of conventional estimation procedures in the context of Phillips curves. Key words: inflation expectations, Kalman filter, stability JEL classification numbers: E32, E37
Note: Ilmestynyt myös: Financial Markets: Principles of Modelling, Forecasting and Decision-making.

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