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Breaks and the Statistical Process of Inflation: The Case of the ‘Modern’ Phillips Curve

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  • Bill Russell
  • Dooruj Rambaccussing

Abstract

‘Modern’ theories of the Phillips curve inadvertently imply that inflation is an integrated or near integrated process but this implication is strongly rejected using United States data. However, if we assume that inflation is a stationary process around a shifting mean (due to changes in monetary policy) then any estimate of long-run relationships will suffer from a ‘small-sample’ problem as there are too few inflation ‘regimes’ where the data are stationary. We offer a ‘4-stage’ solution to this problem and applying this solution to United States data we estimate a significant negative sloping non-linear long-run Phillips curve.

Suggested Citation

  • Bill Russell & Dooruj Rambaccussing, 2016. "Breaks and the Statistical Process of Inflation: The Case of the ‘Modern’ Phillips Curve," Dundee Discussion Papers in Economics 294, Economic Studies, University of Dundee.
    • Handle: RePEc:dun:dpaper:294
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    File URL: http://www.dundee.ac.uk/media/dundeewebsite/economicstudies/documents/discussion/DDPE_294.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Phillips curve; inflation; structural breaks; non-stationary data;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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