INFLATION PERSISTENCE DURING PERIODS OF STRUCTURAL CHANGE: AN ASSESSMENT USING GREEK DATA
George Hondroyiannis
Bank of Greece, Economic Research Department
Sophia Lazaretou
Bank of Greece, Economic Research Department
ABSTRACT
The paper estimates inflation persistence in Greece from 1975 to 2003, a period of high variation in inflation and changes in policy regimes. Three empirical methodologies, univariate autoregressive (AR) modelling, second-generation random coefficient (RC) modelling, and vector autoregressive (VAR) modelling, are employed to estimate inflation persistence. The empirical results from all the procedures suggest that inflation persistence was high during the inflationary period and the first six years of the disinflationary period, while it started to decline after 1997, when inflationary expectations seem to have been stabilised, and thus, monetary policy was effective at reducing inflation. Empirical findings also detect a sluggish response of inflation to changes in monetary policy. This observed delay seems to have changed little over time.
Keywords: CPI inflation; persistence; structural change.
JEL classification: E31; E37.
This paper was presented at the Eurosystem Inflation Persistence Network (IPN) Workshop hosted by the European Central Bank on 29-30 September and 1 October 2003. A condensed version of the paper is published in the ECB, Working Paper Series, 370/June 2004. We are grateful to the IPN participants and especially to Andy Levin, Jordi Gali, Benoit Mojon and an anonymous referee for their comments and suggestions. An earlier version of this paper was benefited from the constructive comments and suggestions of Sophocles Brissimis, Heather Gibson, George Tavlas and Philip Vermeulen. We also acknowledge helpful discussions with Steven Hall, Nicos Magginas, Dafni Papadopoulou, George Simigiannis, P. A. V. B. Swamy, Tetti Tzamourani and Hercules Voridis. We would like to thank the Department of Statistics and the Domestic Economy Division of the Bank of Greece for supplying the data. The views expressed are solely of the authors, and should not be interpreted as reflecting those of the Bank of Greece.
George Hondroyiannis
Economic Research Department
Bank of Greece, 21 El. Venizelou St.
102 50 Athens, Greece
Tel. +30210 - 3202429
Fax +30210 - 3233025
Email: ghondroyiannis@bankofgreece.gr