A Bounded Model of Time Variation in Trend Inflation, NAIRU and the Phillips Curve

Joshua Chan, Gary Koop and Simon Potter (2016)
Journal of Applied Econometrics, 31(3), 551-565
[ Journal Version | Working Paper | Code | Appendix | Trend Inflation Estimates ]

This code estimates a bivariate unobserved components model for inflation and unemployment with 3 features: (1) both the trend inflation and NAIRU are assumed to evolve within bounds; (2) it has time-varying Phillips curve and time-varying inflation persistence; (3) it allows for stochastic volatility.

This nonlinear state space model is estimated using an MCMC algorithm based on fast band matrix routines instead of the Kalman filter.

The methodology is illustrated using an example that involves US CPI inflation and umemployment. Our model yields sensible estimates of trend inflation, NAIRU, inflation persistence and the slope of the Phillips curve.