Presenter(s)

Alison M Berry, Carmen May DeRose

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Description

The U.S Federal Reserve Board uses long term inflation trends and projections to guide its policy decisions on controlling inflation. The objective of this study is to determine if the severe recession in 2008 altered the long term trend in inflation. Using the Consumer Price Index (CPI) as well as the Personal Consumption Expenditure Index (PCE) for our measures of inflation, we first divide the overall period of analysis into two nine year periods, 1999-2007 and 2009-2017, with 2008 the inflection point. Using linear regression with time as the independent variable, we develop regression coefficients (B) for both nine year periods and test the hypothesis that the 1999-2007 B coefficient is larger than the 2009-2017 B coefficient. If the hypothesis is correct, the difference in the B coefficients can be considered a proxy for the 2008 recession effect on trend inflation. We also run another test where a linear regression is run for the complete period but a dummy variable, D1, is added to the equation line with D1=1 for the 12 months in 2008. We test for a negative coefficient attached to D1, which indicates a downward shift in the regression line and provides another measure of the effect of the 08 recession on the inflation trend. Finally we test for a Phillips Curve effect on inflation trend in the 2009-2017 period. With U.S. unemployment reaching a rate around 4% during the last third of the 2009-2017 period, we run another trend regression but add the dummy variable D2 for the months in 2015, 2016, and 2017, in order to test for an upward shift in the inflation regression line. A positive coefficient attached to D2 would suggest the presence of the Phillips Curve affect.

Publication Date

4-18-2018

Project Designation

Independent Research

Primary Advisor

Tony S. Caporale, Robert D. Dean

Primary Advisor's Department

Economics and Finance

Keywords

Stander Symposium project

U.S. Inflation Trends and the 2008 Recession

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