Evolving Post-World War II U.S. Inflation Dynamics
Timothy Cogley,Thomas J. Sargent +1 more
TLDR
This article used Bayesian methods to account for the four sources of uncertainty in a random coefficients vector autoregression for inflation, unemployment, and an interest rate, and used the model to assemble evidence about the evolution of measures of the persistence of inflation, prospective long-horizon forecasts (means) of inflation and unemployment.Abstract:
For postwar U.S. data, this paper uses Bayesian methods to account for the four sources of uncertainty in a random coefficients vector autoregression for inflation, unemployment, and an interest rate. We use the model to assemble evidence about the evolution of measures of the persistence of inflation, prospective long-horizon forecasts (means) of inflation and unemployment, statistics for testing an approximation to the natural-unemployment-rate hypothesis, and a version of the Taylor rule. We relate these measures to stories that interpret the conquest of U.S. inflation under Volcker and Greenspan as reflecting how the monetary policy authority came to learn an approximate version of the natural-unemployment-rate hypothesis. We study Taylor's warning that defects in that approximation may cause the monetary authority to forget the natural-rate hypothesis as the persistence of inflation attenuates.read more
Figures
Figure 14 RECURSIVE TESTS OF THE NATURAL-RATE HYPOTHESIS 
Figure 8 LOG DETERMINANT OF THE MEAN POSTERIOR SPECTRAL DENSITY MATRIX IN SELECTED YEARS 
Figure 17 PROBABILITY OF REJECTING THE NATURAL-RATE HYPOTHESIS, CALCULATED FROM THE POSTERIOR PREDICTIVE DISTRIBUTION FOR THE CONSTANT-GAIN ESTIMATOR 
Figure 9 STANDARD DEVIATION OF ONE-STEP-AHEAD VAR PREDICTION ERRORS 
Figure 4 CYCLICAL COMPONENTS OF INFLATION AND UNEMPLOYMENT 
Figure 5 MEDIAN POSTERIOR SPECTRUM FOR INFLATION
Citations
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Estimation and Inference of Impulse Responses by Local Projections
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Forecasting Output and Inflation: The Role of Asset Prices
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Drifts and volatilities: monetary policies and outcomes in the post WWII US
TL;DR: For a VAR with drifting coefficients and stochastic volatilities, the authors present posterior densities for several objects that are pertinent for designing and evaluating monetary policy, including measures of inflation persistence, the natural rate of unemployment, a core rate of inflation, and ‘activism coefficients' for monetary policy rules.
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Combination forecasts of output growth in a seven-country data set
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A Positive Theory of Monetary Policy in a Natural-Rate Model
Robert J. Barro,David B. Gordon +1 more
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