Inflation Expectations Investigation Using Markov Regime-Switching Autoregression

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Lukianenko, Iryna
Nasachenko, Mariia
Tokarchuk, Taras
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The purpose of the article is to estimate the regimes of low, moderate and high volatility of inflation expectations in Ukraine during the periods of mac-roeconomic instability and crises to find how economic agents’ projections change under the different circumstances. Besides that, study aimed at extensive analysis of the influence of monetary policy and overall situation on the market in general on presuppositions of subjects of economic activity regarding the further dynamics of prices. Based on wide and comprehen-sive literature review the Markov switching autoregression with three re-gimes was used to analyze the probabilities of each of the types of volatility. This approach allows to define the likelihoods of transition from one regime to other and influence of chosen indicators, such as key policy rate, CPI, index of real wage on inflation expectations under low, moderate and high volatility mode. The results show that the high volatility of inflation expecta-tions was the most probable on the sample from January 2013 to August 2020 due to the macroeconomic instability in the country caused by the crisis and global lockdown. Moreover, regime of moderate fluctuations is the longest one and lasts about 5 months in comparison to high and low volatility regimes, which continued only for 4 and 1 months respectively. Findings confirm that during considerable fluctuation of inflation expecta-tions, which prevailed over the research period impact of the key policy rate on economic agents’ judgments about the future prices was the most nota-ble.
Markov switching autoregression, inflation expectations, monetary policy, inflation, macroeconomic instability, crisis, article
Lukianenko I. G. Inflation Expectations Investigation Using Markov Regime-Switching Autoregression / Iryna Lukianenko, Mariia Nasachenko, Taras Tokarchuk // Montenegrin journal of economics. - 2022. - Vol. 18, Issue 1. - P. 19-29. -