Time variation in inflation persistence: New evidence from modelling US inflation

Abstract

This article explores how inflation persistence relates to the conduct and goals of monetary policy by presenting a new approach to modelling US inflation persistence and the Fed's dual mandate. Our framework fills a gap in pre-existing models by more flexibly accounting for diverse dynamic properties and shocks. Estimating a Phillips Curve model augmented with inflation volatilities and expectations, we find that the degree of monthly inflation persistence is time variant since World War II. Variations in persistence continue to be observed regardless of the absolute level of inflation and the extent of the trade-off between inflation and unemployment. We demonstrate that inflation persistence varies in line with expectations formed by memories of past inflation. This supports the case for more flexible monetary policy at times, as in the 1980s or especially the present decade, when inflation is more persistent.