Umeå Economic Studies,
Umeå University, Department of Economics

Abstract: In this paper a comparative study of the regime shift in inflation policies in New Zealand and Sweden is performed. We use a non-parametric regression method to decompose the inflation time series into three components of variation: a long-term trend, a medium-term (cyclical and transient variations) trend and a short-term shocks component. This allows us to study the transition process from the high inflation characterizing the end of the seventies and the eighties to the low inflation observed during the nineties. We find that in New Zealand, although it is initially delayed, the decrease in inflation happens at a faster pace than in Sweden. This may indicate that reforms were more efficient in New Zealand. We also show a clear link between the rising unemployment and the transition from high to low inflation. Furthermore, while in New Zealand a downward adjustment of the unemployment rate happens directly after the transition period, in Sweden there seems to be persistence in high unemployment.

Keywords: Inflation regimes; unemployement; non-parametric regression; components of variation

JEL-codes: C14; E24; E31

19 pages, October 9, 1998

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