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A two-states Markov-switching model of inflation in France and the USA: credible target VS inflation spiral

Author

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  • B. HEITZ

    (Insee)

Abstract

This paper seeks to apply the general framework of Markov-switching models to inflation in France and in the USA. We propose a model where inflation can, alternatively, follow two regimes: the first one, where inflation is stationary, is interpreted as a situation where there exists a credible inflation target, even if it is not explicit; the second one where inflation is integrated. Moreover, observing that the two oil shocks were followed by accelerating inflation periods, we allow dependency of the transition probabilities over the variations of oil price. The model is estimated resorting to an EM algorithm. The results of these modelling are threefold: the influence of oil price variations over the transition probabilities are not significant; American inflation has generally a credible inflation target, apart from some specific episodes; inflation in France experienced a dramatic change with the policy of competitive disinflation, then acquiring a credible inflation target. Inflation; Markov-switching regimes; transition probability; oil shock

Suggested Citation

  • B. Heitz, 2005. "A two-states Markov-switching model of inflation in France and the USA: credible target VS inflation spiral," Documents de Travail de l'Insee - INSEE Working Papers g2005-11, Institut National de la Statistique et des Etudes Economiques.
    • Handle: RePEc:nse:doctra:g2005-11
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    File URL: https://www.bnsp.insee.fr/ark:/12148/bc6p06zr25w/f1.pdf
    File Function: Document de travail de la DESE numéro G2005-11
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    More about this item

    Keywords

    Inflation; Markov-switching regimes; transition probability; oil shock;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods

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