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The US Phillips Curve and inflation expectations: A State Space Markov-Switching explanatory model

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  • Guillaume Guerrero
  • Nicolas Million

Abstract

This paper proposes a new empirical representation of US inflation expectations in a Stace-Space Markov-Switching framework in order to identify the expectations regimes which are associated with short and long term Phillips curves. We explicitly identify the dynamic of inflation expectation errors using the expectations augmented Markov-switching Phillips curve as a measurement equation. In this paper we consider expected inflation as an underlying component of observed inflation. We thus use the same type of specification (occasionally integrated) to describe its dynamic. We have found that dynamics of inflation expectation errors change across regimes. For the last 20 years we show the Phillips curve is vertical and associated with rational inflation expectations. Whereas for the period of economic instability (1973-1983) a negative Phillips curve is associated with adaptive expectations

Suggested Citation

  • Guillaume Guerrero & Nicolas Million, 2004. "The US Phillips Curve and inflation expectations: A State Space Markov-Switching explanatory model," Computing in Economics and Finance 2004 133, Society for Computational Economics.
    • Handle: RePEc:sce:scecf4:133
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    References listed on IDEAS

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    1. Robert J. Gordon, 1997. "The Time-Varying NAIRU and Its Implications for Economic Policy," Journal of Economic Perspectives, American Economic Association, vol. 11(1), pages 11-32, Winter.
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    5. Ang, Andrew & Bekaert, Geert, 2002. "Regime Switches in Interest Rates," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(2), pages 163-182, April.
    6. Kim, Chang-Jin, 1994. "Dynamic linear models with Markov-switching," Journal of Econometrics, Elsevier, vol. 60(1-2), pages 1-22.
    7. repec:bla:econom:v:42:y:1975:i:166:p:123-38 is not listed on IDEAS
    8. Paul Mylonas & Sebastian Schich, 1999. "The Use of Financial Market Indicators by Monetary Authorities," OECD Economics Department Working Papers 223, OECD Publishing.
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    Cited by:

    1. Kim Chang-Jin & Kim Yunmi, 2008. "Is the Backward-Looking Component Important in a New Keynesian Phillips Curve?," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 12(3), pages 1-20, September.

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    More about this item

    Keywords

    State-Space Markov-Switching model; Inflation expectation errors; Phillips curve; occasionally integrated process;
    All these keywords.

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation

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