Title: The US post-war economic dynamics and price/wage setting processes: A regime-switching DSGE approach
Authors: Giovanni Di Bartolomeo - Sapienza University of Rome (Italy) [presenting]
Elton Beqiraj - Sapienza University of Rome (Italy)
Abstract: This paper reconsiders the evolution of the US business cycle by considering a Markow-switching (MS) approach. To capture the traditional debate between "good luck" and "good policy," we introduce the possibility of a regime switches in monetary policy parameters and in the variability of shocks. The novelty of our paper is also considering switches in the Phillips curves of wages and prices; in particular, we consider switches in the intrinsic inertia of wage and price inflation. The inertia is formalized through time-dependent price adjustments based on hazard functions that are not flat. From this point of view, our paper attempt to conciliate the literature on time-dependent to that of the state-dependent price adjustment. Our preliminary results can be summarized as follows. 1) Price and wage inflation intrinsic persistence matters for MS models (i.e., MS switches in the price and wage hazard). 2) Great Moderation is mainly explained by changes in the shock volatilities (good luck), once we control for intrinsic persistence of prices, MS monetary regimes do not account (good policies) for the observed macroeconomic changes, 3) Great Inflation is driven by changes in the price hazard. Price and wage setting institutions matter. 4) New interpretation of switches in monetary policy regime based on Brainard Principle and deviations from it based on current judgments.