Structural changes in inflation dynamics: Multiple breaks at different dates for different parameters

Abstract

I consider complicated patterns of structural breaks in postwar quarterly US inflation rates based on the CPI and the GDP deflator over the period from 1953:Q1 to 2013:Q4. Bayesian model selection procedures suggest that the two inflation measures had distinct structural changes in different parameters as well as at different dates. CPI inflation experienced a dramatic drop in persistence around the early 1980s, but GDP deflator inflation remains persistent throughout the postwar sample period. The residual variance for both inflation measures switched from a low volatility regime to a high volatility regime in the early 1970s, but returned to another low volatility regime at different dates: the early 1980s for GDP deflator inflation and the early 1990s for CPI inflation. The residual variance for CPI inflation has increased again since the early 2000s, while GDP deflator inflation has remained less volatile. I do not find evidence of a structural shift in the unconditional mean of either measure of inflation. When reviewing the recent literature, considerable controversy exists over the structural break in inflation persistence around the early 1980s but this appears to be dependent on the measures of inflation, as highlighted by the empirical findings in this paper.