Research Discussion Papers, Bank of Finland
No 25/2005:
Inflation expectations and regime shifts in the euro area
Matti Virén ()
Abstract: This paper focuses on the determination of inflation
expectations. The following two questions are exam-ined: How much do
inflation expectations reflect different economic and institutional regime
shifts and in which way do inflation expectations adjust to past inflation?
The basic idea in the analysis is an assump-tion that inflation
expectations do not mechanically reflect past inflation as may econometric
specification de facto assume but rather they depend on the relevant
economic regime. Also the adjustment of expecta-tions to past inflation is
different in different inflation regimes. The regime analysis is based on
panel data from EMU/EU countries for the period 1973–2004, while the
inflation adjustment analysis mainly uses the Kalman filter technique for
individual countries for the same period. Expectations (forecasts) are
de-rived from OECD data. Empirical results strongly favour the
regime-sensitivity hypothesis and provide an explanation for the poor
performance of conventional estimation procedures in the context of
Phillips curves.
Keywords: inflation expectations; Kalman filter; stability; (follow links to similar papers)
JEL-Codes: E32; E37; (follow links to similar papers)
29 pages, October 11, 2005
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