RICERCA ITALIANA     

New directions in the theoretical and empirical modelling of inflation

Università degli Studi di Torino

Abstract

The proposed research concerns the theoretical and empirical analysis of the inflationary process.

At the theoretical level, we will study the determinants of inflation persistence, within the framework of the "new-keynesian Phillips curve", analysing in particular the effect of alternative assumptions about the staggering of price decisions and on the presence of a positive steady-state inflation rate on the robustness of the results of this class of models about optimal monetary policy design.

On the empirical side, the general purpose of the project is to develop forecasting models and more general methodological tools to support the monetary policy decision-making process, particularly in the Euro area. Several specific topics will be addressed, namely: the estimation of the long-run behaviour of inflation ("core" inflation measurement); the application of various modelling tecniques (non-linear models and models with time-varying parameters) to inflation forecasting; the analysis of inflation dynamics in the European Union accession countries.

Principal Investigator

Fabio Cesare BAGLIANO Università degli Studi di TORINO

Research Objectives

The proposed research aims at studying several, theoretical and empirical, issues in inflation modelling, In the existing literature in this field there are still some important open issues that our project intends to address.

In summary, the main (and closely related) research fields in which our project aims to produce original contributions, are the following:

(1) the theoretical analysis of the observed persistence of the inflationary process, with particular reference to alternative staggering schemes of price setting decisions, and to the presence of a positive long-run, trend inflation rate in the economy;

(2) the construction of empirical models of the inflationary process, directly derived from the relevant economic theory, as useful tools for short- and long-term forecasting to be employed in the policy decision-making process, particularly in the Euro area. The empirical part of the project, in turn, will develop along several lines of research, mainly concerning the following topics:
(a) the specification of non-linear forecasting models for inflation;
(b) the use of several time-varying parameters models in the empirical analysis of inflation;
(c) the development of new methodologies to measure the core inflation rate;
(d) the construction of models to explain and forecast inflation in the EU accession countries;
(e) the development of new methodologies for >>>

Timescale

24 months

National and international background

Over the last two decades, in the economic literature about monetary policy and in the practical monetary policy conduct by several Central Banks, controlling inflation has become the main final goal for monetary authorities. Inflation targeting policies, setting explicit quantitative targets for monetary policymakers, have been recently implemented in several countries.

The strong emphasis on inflation control in monetary policy design has motivated recent developments in the theoretical and empirical analysis of the inflationary process, aimed at studying the nature, propagation mechanisms and persistence of inflationary shocks and at improving inflation measurement techniques and inflation forecasting models. Both those lines of investigation motivate our research project, which is aimed at addressing some open issues in the theoretical literature on inflation and optimal monetary policy, and at improving the inflation measurement and forecasting techniques used by policymakers.

For ease of exposition, in what follows we deal first with the theoretical issues more directly related to our research, and then we turn to the main empirical issues.

At the theoretical level, several aspects of our research are based on the recent dynamic, stochastic, general equilibrium models combining typical elements of the real business cycle literature (microfoundations and intertemporal optimisation) and characteristic features of the >>>