Working Paper Series : Institute for Monetary and Financial Stability
Forecasting and policy making
Maik Hendrik Wolters
The changing dynamics of US inflation persistence: a quantile regression approach
Maik Hendrik Wolters
- We examine both the degree and the structural stability of inflation persis tence at different quantiles of the conditional inflation distribution. Previous research focused exclusively on persistence at the conditional mean of the inflation rate. Economic theory, however, provides various reasons -for example downward wage rigidities or menu costs- to expect higher inflation persistence at the upper than at the lower tail of the conditional inflation distribution.
Based on post-war US data we indeed find slower mean reversion in response to positive than to negative shocks. We find robust evidence for a structural break in persistence at all quantiles of the inflation process in the early 1980s. Inflation persistence has decreased and become more homogeneous across quantiles. Persistence at the conditional mean became more informative about the degree of persistence across the entire conditional inflation distribution. While prior to the 1980s inflation was not mean reverting in response to large positive shocks, our evidence strongly suggests that since the end of the Volcker disinflation the unit root can be rejected at every quantile including the upper tail of the conditional inflation distribution.
Complexity and monetary policy
- The complexity resulting from intertwined uncertainties regarding model misspecification
and mismeasurement of the state of the economy defines the monetary policy landscape.
Using the euro area as laboratory this paper explores the design of robust policy guides
aiming to maintain stability in the economy while recognizing this complexity. We document
substantial output gap mismeasurement and make use of a new model data base to capture
the evolution of model specification. A simple interest rate rule is employed to interpret
ECB policy since 1999. An evaluation of alternative policy rules across 11 models of the
euro area confirms the fragility of policy analysis optimized for any specific model and shows
the merits of model averaging in policy design. Interestingly, a simple difference rule with
the same coefficients on inflation and output growth as the one used to interpret ECB policy
is quite robust as long as it responds to current outcomes of these variables.