Is core CPI inflation in a brand new regime? Outcomes utilizing a Markov switching mannequin (pioneered by James Hamilton).
Determine 1: Core CPI inflation m/m in log variations (blue). NBER outlined peak-to-trough recession dates shaded grey. Supply: BLS, NBER, and creator’s calculations.
Making use of a easy Markov switching 2-regime estimation methodology (carried out in EViews, utilizing default settings, permitting for various variances) over the 1960-2022 interval yields the followin estimate.
This estimate yields the next estimates of regimes (filtered, smoothed):
The estimates point out a 30% chance of being within the low inflation regime. The outcomes are considerably delicate to assumptions concerning the variances within the two regimes. Imposing a restriction of widespread variances results in the next estimated possibilities of being within the two regimes.
Imposing the restriction of widespread variances, the indications are a lot stronger for a change to the low inflation regime.