Understanding the Evolving the Evolving Inflation Process

Stephen Cecchetti, Peter Hooper, Bruce Kasman, Kermit Schoenholtz and Mark Watson
Additional contact information
Peter Hooper: Deutsche Bank
Bruce Kasman: JPMorganChase
Mark Watson: Princeton University

Working Papers from Princeton University. Economics Department.

Abstract: This report uses international comparisons to understand U.S. inflation dynamics since 1960. We decompose each G-7 countryâ€™s inflation path into a time-varying trend plus a transitory component, each with time-varying volatility. The level and volatility of trend inflation display coincident hump-shaped patterns that allow us to date the start of the Great Inflation in the late 1960s and a synchronized Inflation Stabilization beginning in the mid 1980s. This temporal clustering narrows the set of G-7-wide economic developments which could have triggered the excessive monetary policy accommodation that was the ultimate source of the Great Inflation. We present evidence suggesting that the most likely explanation is a change in monetary regime. Another robust feature of the data is that changes in inflation are negatively serially correlated. Conventional versions of a workhorse macroeconomic model regularly used by central banks cannot account for this pattern. Finally, we show that in the United States neither survey nor other measures of inflation expectations provide useful forecasts of the estimated trend in U.S. core CPI inflation, and that the trend also influences these survey measures over time.

Keywords: U.S.; Inflation; G-7 Countries (search for similar items in EconPapers)
JEL-codes: E31 (search for similar items in EconPapers)
Date: 2007-07
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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http://www.princeton.edu/~mwatson/papers/USMPF_Report_July_2007.pdf

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Persistent link: https://EconPapers.repec.org/RePEc:pri:econom:2007-4

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