Does the Persistence of Output Growth Depend on Inflation Regimes?
Evidence reveals that the sizes of output persistence measures are smaller when inflation is above the 6 % threshold relative to when inflation is less or equal to 6 %. We also determine whether the average frequency of price changes based on Kiley (2000) differs between the high inflation regime and the low regimes. Evidence shows that the average frequency of price changes is relatively shorter in the high inflation regime than in the low regime. Evidence shows that increased price flexibility in the high inflation regime weakens the responses of household consumption growth to an expansionary monetary policy shock. However, the reduced price flexibility in the low inflation regime magnifies the household consumption growth increase due to expansionary monetary policy shocks. From a policy perspective, this implies that an expansionary monetary policy shock, when inflation is below 6 %, will stimulate household consumption growth more than raising the inflation rate because prices are less flexible.
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