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Inflation persistence in central and eastern European countries

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Abstract:

This article studies inflation persistence with time-varying coefficient autoregressions for 12 central European countries in comparison with the United States and the euro area. We find that inflation persistence tends to be higher in times of high inflation. Since the oil price shocks, inflation persistence has declined both in the United States and the euro area. In most central and eastern European countries, for which our study covers 1993–2012, inflation persistence has also declined, with the main exceptions of the Czech Republic, Slovakia and Slovenia, where persistence seems to be rather stable. Our findings have implications for the conduct of monetary policy and for a possible membership in the euro area. Among the two time-varying coefficient methods we use, our results favour the flexible least squares smoother over the Kalman smoother. We also conclude that the OLS estimate of an autoregression is likely upward biased relative to the time-average of time-varying parameters, when the parameters change.

Keywords: C22; E31; Kalman filter; flexible least squares; inflation persistence; time-varying coefficient models

Document Type: Research Article

DOI: https://doi.org/10.1080/00036846.2013.875113

Affiliations: 1: Bruegel, Brussels, 1210, Belgium 2: Corvinus University of Budapest, Budapest, Hungary

Publication date: 2014-05-03

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