Abstract:
The persistence property of inflation is an important issue for not
only economists, but, especially for central banks, given that the degree
of inflation persistence determines the extent to which central
banks can control inflation. Further, not only is the level of inflation
persistence that is important in economic analyses, but also the question
of whether the persistence varies over time, for instance, across
business cycle phases, is equally pertinent, since assuming constant
persistence across states of the economy, is sure to lead to misguided
policy decisions. Against this backdrop, we extend the literature
on long-memory models of inflation persistence for the US economy
over the monthly period of 1876:2-2014:5, by developing an autoregressive
fractionally integrated moving average-generalized autoregressive
conditional heteroskedastic (ARFIMA-GARCH) model, with
a time-varying memory coefficient which varies across expansions
and recessions. In sum, we find that, inflation persistence does vary
across recessions and expansions, with it being significantly higher
in the former than in the latter. As an aside, we also show that, persistence
of inflation volatility however, is higher during expansions
than in recessions. Understandably, our results have important policy
implications.