A Bounded Model of Time Variation in Trend Inflation, Nairu and the Phillips Curve

Chan, JCC; Koop, G; Potter, SM

A Bounded Model of Time Variation in Trend Inflation, Nairu and the Phillips Curve

Chan, JCC

Koop, G Potter, SM

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Publication Type:: Journal Article
Citation:: Journal of Applied Econometrics, 2016, 31 (3), pp. 551 - 565
Issue Date:: 2016-04-01

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Field	Value	Language
dc.contributor.author	Chan, JCC https://orcid.org/0000-0003-3632-128X	en_US
dc.contributor.author	Koop, G	en_US
dc.contributor.author	Potter, SM	en_US
dc.date.issued	2016-04-01	en_US
dc.identifier.citation	Journal of Applied Econometrics, 2016, 31 (3), pp. 551 - 565	en_US
dc.identifier.issn	0883-7252	en_US
dc.identifier.uri	http://hdl.handle.net/10453/112174
dc.description.abstract	© 2016 John Wiley & Sons, Ltd. 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 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.	en_US
dc.relation.ispartof	Journal of Applied Econometrics	en_US
dc.relation.isbasedon	10.1002/jae.2442	en_US
dc.subject.classification	Econometrics	en_US
dc.title	A Bounded Model of Time Variation in Trend Inflation, Nairu and the Phillips Curve	en_US
dc.type	Journal Article
utslib.citation.volume	3	en_US
utslib.citation.volume	31	en_US
utslib.for	1402 Applied Economics	en_US
utslib.for	1403 Econometrics	en_US
pubs.embargo.period	Not known	en_US
pubs.organisational-group	/University of Technology Sydney
pubs.organisational-group	/University of Technology Sydney/Faculty of Business
pubs.organisational-group	/University of Technology Sydney/Faculty of Business/Economics Discipline
utslib.copyright.status	closed_access
pubs.issue	3	en_US
pubs.publication-status	Published	en_US
pubs.volume	31	en_US

Abstract:

© 2016 John Wiley & Sons, Ltd. 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 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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http://hdl.handle.net/10453/112174