A Bounded Model of Time Variation in Trend Inflation, NAIRU and the Phillips Curve
نویسندگان
چکیده
In this paper, we develop a bivariate unobserved components model for inflation and unemployment. The unobserved components are trend inflation and the non-accelerating inflation rate of unemployment (NAIRU). Our model also incorporates a time-varying Phillips curve and time-varying inflation persistence. What sets this paper apart from the existing literature is that we do not use unbounded random walks for the unobserved components, but rather use bounded random walks. For instance, NAIRU is assumed to evolve within bounds. Our empirical work shows the importance of bounding. We find that our bounded bivariate model forecasts better than many alternatives, including a version of our model with unbounded unobserved components. Our model also yields sensible estimates of trend inflation, NAIRU, inflation persistence and the slope of the Phillips curve.
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A State-Dependent Model for Inflation Forecasting
We develop a parsimonious bivariate model of inflation and unemployment that allows for persistent variation in trend inflation and the NAIRU. The model, which consists of five unobserved components (including the trends) with stochastic volatility, implies a time-varying VAR for changes in the rates of inflation and unemployment. The implied backwards-looking Phillips curve has a time-varying ...
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This appendix contains two sections. The first is a technical appendix which describes the prior and MCMC algorithm used to estimate our bivariate model of inflation and unemployment (labelled Bi-UC in the paper). It also provides additional estimation details about the other models used for comparison. The second is section contains a prior predictive analysis. Papers cited in this appendix ar...
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