We find substantial variation in serial correlation of underlying inflation rates and we find this variation is positively related to the increase in correlations as data are averaged over longer periods.
We show that serial correlation in the underlying inflation rate ties these two observations together and explains them.
In this section, we provide an explanation based on variation of the underlying inflation rate relative to the demand for money.
In this section, we derive testable predictions concerning the evolution of the underlying inflation rate and the correlation of excess money growth and inflation.
Consistent with the argument above, suppose that errors in the demand for money are serially uncorrelated but suppose that the underlying inflation rate, or inflation target, evolves over time according to
The parameter [beta] represents the serial correlation in the underlying inflation rate.
The underlying inflation rates in the Riksbank forecast are approximately the same: 1.
To judge from the inflationary effects in the alternative scenarios, it is relatively unlikely that the current outlook for growth (no matter whether developments follow the NIER or the Riksbank forecast) would lead to an underlying inflation rate above 2 percent.