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This paper demonstrates that the behavior of the conventional Phelps-Taylor model of overlapping wage contracts stands in stark contrast with important features of U.S. macro data for inflation and output. In particular, the Phelps-Taylor specification implies far too little inflation persistence. The authors present a new contracting model, in whi...
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... was difficult at first to reconcile the very smooth, continuous behavior of measured aggregate price indexes such as the consumer price index with the flexible-price implications of these early rational expectations models. Figure 1 displays the consumer price index for the post-war period. ...
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... these assumptions, the autocorrelations for inflation are indeed quite high. Figure 10 ...
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... a description of the data, this simple model does reasonably well in recent years, as figure 11 suggests. The figure shows the errors made by a model that forecasts the four-quarter log change in prices as equal to its sample mean, versus one that sets the forecast equal to the previous four-quarter change. ...
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... resulting regression estimates are displayed in the summary table below and the histograms in the panels of figure 12. For the first model, figure 12 and table 12 show that the standard error on the estimated lag coefficient is large; the median t-statistic for the hypothesis that α = 0 has a p-value above The results of the second regression model, displayed in the bottom panel of table 12, suggest that matters are even worse when one tests for the presence of a Phillips-like relationship in the misspecified model for a small sample. ...
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... resulting regression estimates are displayed in the summary table below and the histograms in the panels of figure 12. For the first model, figure 12 and table 12 show that the standard error on the estimated lag coefficient is large; the median t-statistic for the hypothesis that α = 0 has a p-value above The results of the second regression model, displayed in the bottom panel of table 12, suggest that matters are even worse when one tests for the presence of a Phillips-like relationship in the misspecified model for a small sample. Now the median estimate of α is smaller still, it is imprecisely estimated (the median p-value for the test of α = 0 is greater than 0.10), and the effect of output is biased downward and very imprecisely estimated. ...
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... distribution of the mean of inflation, which is a nonlinear function of α and c (¯ π = α ), implies a relatively large standard error for the mean of 2.3. 57 A good portion of the downward bias evident in the estimates in figure 12 arises from the truncation of the lags of inflation compared with the lags in the data-generating process. Still, in large samples, the regression should retrieve the sum of the underlying AR coefficients in the single autoregressive coefficient. ...
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Not in an estimated DSGE model of the US economy, once we account for the fact that most of the high-frequency volatility in wages appears to be due to noise, rather than to variation in workers' preferences or market power.
Citations
... The effectiveness of monetary policy strategy lies in its ability to achieve low in ation persistence which means that in ation rate shocks can be quickly eliminated (Bratsiotis et (Fuhrer & Moore, 1995), which is the in ation response to its own shocks. This type of persistence emphasises how in ation responds to its own disturbances. ...
This study aims to analyse the relationship between exchange rate and inflation rates persistence in North African countries (Algeria, Tunisia, and Morocco) to determine the extent of inflation persistence in face to exchange rate shocks from January 1987 to April 2023 using the recently developed Fractional Cointegration Model. This topic was chosen due to its significance for monetary policymakers, investors, financial analysts and academics in understanding the dynamics of inflation persistence in North African countries. Our results also showed that Algeria, Tunisia and Morocco has a co-integration relationship between exchange rate and the inflation rate, As exchange rate shocks cause permanent inflation persistence in Algeria and the variation in the inflation rate in Tunisia will persistence for a longer period due to the shock of exchange rate before eventually fading away and the change in the persistence of inflation rate in a Morocco due to an exchange rate shock will fade away within a short period.
... In addition, there is another type of persistence mentioned by Fuhrer & Moore (1995), which is the infl ation response to its own shocks. Th is type of persistence emphasises how infl ation responds to its own disturbances. ...
This study aims to analyse the relationship between gold price and inflation rates in Algeria to determine the extent of inflation persistence in face to gold price shocks from January1992 to March 2023 using the recently developed Fractional Cointegration Model, which allows residuals to be fractionally integrated rather than stationary, with the classical cointegration approach based on I(0) stationarity or I(1) cointegrating relationships. This topic was chosen due to its significance for monetary policymakers, investors, financial analysts and academics in understanding the dynamics of inflation persistence in Algeria and studying the impact of some prices shocks on it, such as gold price shocks, These shocks were affected by several factors, the most important of which is the Ukrainian war, which contributed to the rise of gold price to record levels. Our results also showed that Algeria has a co-integration relationship between gold price and the inflation rate, with an estimated persistence of 0.593, which is greater than 0.5 and less than 1. This indicates that the impact of gold price shocks is still present for a long time on the inflation rate persistence in Algeria, in other words the inflation rate in Algeria will persistence for a longer period due to the shock of gold price before eventually fading away, and with the adoption of a monetary policy targeting inflation in Algeria, it will contribute to reducing the inflation rates persistence.
... They found evidence of nonlinearities in most cases, but of persistence only in a few ones. Note that a lot of the available empirical evidence can be rationalized in terms of the contracting model developed by Fuhrer and Moore (1995), in which agents are concerned with relative real wages. ...
This paper analyses monthly price persistence in the EU27 countries over the period 2010–2022 using a fractional integration framework, where the measure of persistence is the fractional differencing parameter d. In addition to full sample estimates, subsample and recursive ones are obtained to examine time variation. On the whole, the results provide clear evidence that both the exogenous shocks considered (namely, the COVID-19 pandemic and the Russia-Ukraine war) have generally increased price persistence in the EU27 (despite their heterogeneity), although the recursive estimates suggest that their impact might have peaked and might now be decreasing. Therefore, any policies adopted to counteract those shocks should be gradually phased out. The exceptions are the Southern European countries, where price persistence appears to have decreased, though in Italy the recursive analysis indicates that it is now rising sharply.
... Orphanides (2001) and Ball and Robert (2002) used Ordinary Least Squares methods and made implausible identification assumptions in order to avoid an endogeneity bias. Full-information Maximum Likelihood Estimation (FMLE) has been employed by Fuhrer and Moore (1995), Leeper and Sims (1994) and Kim (2000). One problem in estimating DSGE models by FMLE, however, is that estimates of FMLE structural parameters are often at odds with additional information or observations. ...
Ethiopia has set the goal to be one of the Lower-Middle-Income (LMI) economies
in the world by 2025. With that the target is to reach a GDP range of 147.5 to 578.4
bl. US$ and a GDP per capita range of 1,137 to 4,458 US$ by 2025. The present
study asks whether Ethiopia is likely to reach these targets or not if the trends,
dynamics, and volatility that have been experienced during the last decades persist.
The out-of-sample forecast was analyzed using DSGE and VAR models, and the
data set used in this study underwent a structural break test. Based on 1990-2018
data, the Nominal GDP of the Ethiopian economy is predicted to be 130.86 bl. US$
by the VAR model and 131.52 bl. US$ by the DSGE model in 2025. The 2004-2018
data gives a higher and above LMI margin predicted value of 164.84 bl. US$ and
169.69 bl. US$ for the VAR and DSGE models, respectively. Using the 2004-2018
data, the 2025 Nominal GDP in US$ is forecasted to be more than 164 bl, and the
GDP per capita between 923 to 1,123 US$. Even though Ethiopia may surpass the
target set in terms of Nominal GDP and come close to the GDP per capita target,
still a lot necessity be done to make the goal of reaching the LMI status credible.
Therefore, structural, financial and economic reforms, infrastructural investments
and nurturing macro-economic balance, are among the policy measures that need
to be taken to achieve a resilient LMI status by 2025.
... There is an extensive body of literature on inflation inertia. While the lag effect plays an important role in determining inflation, there is also robust evidence that the extent of inflation persistence had declined since the 1990s with global disinflation leading to low and stable inflation 1 Fuhrer and Moore (1995) and Fuhrer (2010) provide comprehensive overviews of inflation persistence. expectations, especially owing to greater central bank independence to pursue inflation targeting (Baum et al. 1999;Cogley and Sargent 2005;Kumar and Okimoto 2007;Levin and Piger 2003;O'Reilly and Whelan 2005;Stock and Watson 2007). ...
The post-pandemic rise in consumer prices across the world has renewed interest in inflation dynamics after decades of global disinflation. This paper contributes to the literature by providing a granular investigation of inflation persistence at the city level in Lithuania during the period 2000–2021, as well as a comparison of inflation persistence at the country level vis-à-vis the eurozone over the same period. Using disaggregate monthly data on the Consumer Price Index (CPI) collected in five major cities, the empirical analysis finds a mixed and ambiguous picture of inflation persistence across all CPI subcomponents. While there are mixed results for persistence of the headline inflation, most consumption categories exhibit significant persistence. As a result, shocks may not remain transitory and instead have persistent effects that could spillover across subcomponents depending on the size of the shock.
... In addition, there is another type of persistence mentioned by Fuhrer & Moore [28], which is the infl ation response to its own shocks. Th is type of persistence emphasises how infl ation responds to its own disturbances. ...
This study aims to analyse the relationship between oil prices and inflation rates in Algeria to determine the extent of inflation persistence in face to oil price shocks from January1998 to March 2023 using the recently developed Fractional Cointegration Model, which allows residuals to be fractionally integrated rather than stationary, with the classical cointegration approach based on I(0) stationarity or I(1) cointegrating relationships. This topic was chosen due to its significance for monetary policymakers, investors, financial analysts and academics in understanding the dynamics of inflation persistence in Algeria and studying the impact of some price shocks on it, such as oil price shocks. Our results also showed that Algeria has a co-integration relationship between oil prices and the inflation rate, with an estimated persistence of 0.883, which is greater than 0.5 and less than 1. This indicates that the impact of oil price shocks is still present for a long time on the inflation rate persistence in Algeria, in other words the inflation rate in Algeria will persistence for a longer period due to the shock of oil prices before eventually fading away, and with the adoption of a monetary policy targeting inflation in Algeria, it will contribute to reducing the inflation rates persistence.
... Researchers ask whether inflation is inertial in itself or if inertia is inherited from the inertia of real business activity variables (output or unemployment). It is proposed to distinguish between structural, that is, internal, and reduced-form, that is, inherited, persistence [Fuhrer, 2010]. ...
Global inflation is one of the most significant challenges for the post-pandemic world economy. After several decades of low inflation and even elements of deflationary processes in developed countries, the danger of falling into a new period of great inflation had seemed insignificant. Dovish monetary policy during the 2009–19 period did not provoke a spike in inflation, and the slowdown of the economy during the lockdown period put the vigilance to rest. However, the COVID-19 pandemic and anti-crisis measures it triggered, the Russia-Ukraine conflict, and sanctions and anti-sanctions solidified inflationary processes around the world, both in developed and developing countries. In this article, we show the inertial nature of inflation in both the U.S. and the European Union (EU) and argue that there has been a transition to a high inflation regime, despite the decline in developed country inflation in the first quarter of 2023 mentioned in the International Monetary Fund’s (IMF) January report. Getting out of this high inflation regime will require much more serious and time-consuming measures than those used to manage inflation in the low inflation regime.
... Stochastic singularity, which must be overcome by either increasing measurement errors or limiting the number of observables to the number of exogenous shocks, and identification problems, which forced researchers to fix a subset of the parameters during the maximization of the likelihood function, are obstacles to MLE. Full-Information Maximum Likelihood Estimation (FMLE) has been also employed by Fuhrer and Moore (1995), Leeper and Sims (1995) and Kim (2000). One problem in estimating DSGE models by FMLE, however, is that estimates of FMLE structural parameters are often at odds with additional information or observations. ...
In the 1990s, the competition between Keynesian and Classical ideas on macroeconomics ended with the ‘the new neoclassical synthesis’. The synthesis led to the Dynamic Stochastic General Equilibrium (DSGE) models, which is regarded as a powerful instrument for analyzing policy, forecasting and governing Central Banks (CB). Discussion has been made on the evolution, value additions, advantages and downsides of macroeconometric–general equilibrium models and estimation methods. The purpose is to make a critical assessment of applicability and developments in DSGE modeling. A sample of 168 studies was considered for the analysis. More than 90% of the DSGE studies were conducted after the great recession of 2008/09. In developing countries, DSGE research is inadequate, for which a shortage of skills, awareness and the debates of its applicability in developing countries may be responsible factors. Its computational power and adaptability to a multitude of problems inspired 60% of studies to apply Bayesian techniques of estimation. Although DSGE has limitations, it continues to evolve its methodology and to be used by CBs. Based on its current state of development, the coexistence of DSGE with other policy analysis and forecasting models is recommended for improved policy decision making.
... Stochastic singularity, which must be overcome by either increasing measurement errors or limiting the number of observables to the number of exogenous shocks, and identification problems, which forced researchers to fix a subset of the parameters during the maximization of the likelihood function, are obstacles to MLE. Full-Information Maximum Likelihood Estimation (FMLE) has been also employed by Fuhrer and Moore (1995), Leeper and Sims (1995) and Kim (2000). One problem in estimating DSGE models by FMLE, however, is that estimates of FMLE structural parameters are often at odds with additional information or observations. ...
In the 1990s, the competition between Keynesian and Classical ideas on macroeconomics ended with the ‘the new neoclassical synthesis’. The synthesis led to the Dynamic Stochastic General Equilibrium (DSGE) models, which is regarded as a powerful instrument for analyzing policy, forecasting and governing Central Banks (CB). Discussion has been made on the evolution, value additions, advantages and downsides of macroeconometric–general equilibrium models and estimation methods. The purpose is to make a critical assessment of applicability and developments in DSGE modeling. A sample of 168 studies was considered for the analysis. More than 90% of the DSGE studies were conducted after the great recession of 2008/09. In developing countries, DSGE research is inadequate, for which a shortage of skills, awareness and the debates of its applicability in developing countries may be responsible factors. Its computational power and adaptability to a multitude of problems inspired 60% of studies to apply Bayesian techniques of estimation. Although DSGE has limitations, it continues to evolve its methodology and to be used by CBs. Based on its current state of development, the coexistence of DSGE with other policy analysis and forecasting models is recommended for improved policy decision making.
... A primeira medida de persistência acima mencionada, que considera que o passado da inflação pode ser explicado a partir de um modelo de séries temporais univariado, é conhecida na literatura como persistência na forma reduzida (Fuhrer, 2010). Essa medida na forma reduzida refere-se a uma propriedade empírica da série de inflação observada, sem interpretação econômica e, geralmente, considera-se um simples modelo autorregressivo para representar a trajetória passada da inflação, onde os choques são medidos no componente de ruído branco desse processo. ...
... A equação em (6) considera que apenas os choques passados da inflação afetam sua persistência. Entretanto, mudanças na persistência da inflação podem estar associadas à mudanças nos determinantes subjacentes da inflação (O'Really;Whelan, 2005;Fuhrer, 2010). Ademais, mudanças no comportamento da inflação também podem estar associadas ao comportamento sistemático do banco central, considerando que o policymaker pode seguir uma regra de Taylor com metas de inflação na definição da política monetária 13 . ...
A persistência da inflação está relacionada com o grau em que os valores futuros de inflação estão relacionados com os choques passados, ou ainda, com a velocidade de ajuste de sua trajetória para o equilíbrio de longo prazo. Este artigo tem como objetivo mensurar a persistência da inflação no período pós Plano Real e verificar possíveis instabilidades neste parâmetro. Modelos univariados e estruturais são utilizados para mensurar a persistência da inflação. Os resultados encontrados sugerem a existência de instabilidades no parâmetro da persistência, com uma diminuição neste valor após a adoção do sistema de metas para a inflação.
