Reaching Inflation Stability

• Autores: Antonio Moreno Ibáñez
• Localización: Working Papers ( Universidad de Navarra. Facultad de Ciencias Económicas y Empresariales ), Nº. 13, 2003
• Idioma: inglés
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• Resumen

  • Inflation volatility has significantly declined over the last 20 years in the U.S. To find out why, I follow a structural approach. I estimate a complete New Keynesian model which imposes cross-equation restrictions on the time series of inflation, the output gap and the interest rate. I perform counterfactual analysis with the most commonly used measures of inflation: Consumer Price Index (CPI) and Gross Domestic Product Deflator (GDPD). While the change in the propagation mechanism of the economy induced most of the CPI volatility drop, it played a smaller role in the reduction of GDPD volatility. Our maximum likelihood estimates imply that the most important factor behind the drop in inflation volatility was the more forward-looking price setting behavior of the 80s and 90s.