We are grateful to Anindya Banerjee (editor), an anonymous referee, Henri Nyberg and Antti Ripatti for useful comments. We thank the Academy of Finland and the OP-Pohjola Group Research Foundation for financial support. Part of this research was done while the first author was visiting the German Institute for Economic Research in Berlin, whose hospitality is gratefully acknowledged.
Does Output Gap, Labour's Share or Unemployment Rate Drive Inflation?†
Version of Record online: 23 JUN 2013
© 2013 The Department of Economics, University of Oxford and John Wiley & Sons Ltd.
Oxford Bulletin of Economics and Statistics
Volume 76, Issue 5, pages 715–726, October 2014
How to Cite
Lanne, M. and Luoto, J. (2014), Does Output Gap, Labour's Share or Unemployment Rate Drive Inflation?. Oxford Bulletin of Economics and Statistics, 76: 715–726. doi: 10.1111/obes.12041
- Issue online: 26 AUG 2014
- Version of Record online: 23 JUN 2013
- Manuscript Received: 19 MAY 2013
We propose a new methodology for ranking in probability the commonly proposed drivers of inflation in the new Keynesian model. The approach is based on Bayesian model selection among restricted vector autoregressive (VAR) models, each of which embodies only one or none of the candidate variables as the driver. Simulation experiments suggest that our procedure is superior to the previously used conventional pairwise Granger causality tests in detecting the true driver. Empirical results lend little support to labour share, output gap or unemployment rate as the driver of US inflation.