Time-Varying Inflation Persistence and Monetary Regime Credibility: A Long-Term Perspective

This study estimates a Phillips curve with time-varying parameters and stochastic volatility to examine the evolution of inflation persistence across different monetary regimes over the period 1870–2020. Using long-run macroeconomic data for the United Kingdom and the United States, we document substantial variation in inflation persistence over time in both countries. By combining these time-varying estimates with a novel, data-driven measure of regime credibility, we provide empirical evidence that credibility plays a key role in shaping inflation dynamics. In particular, periods characterized by higher monetary policy credibility are associated with significantly lower inflation persistence. Lending support to the credibility hypothesis, these results highlight the importance of the monetary regime in driving inflation outcomes. Complementing our quantitative analysis with historical narrative evidence, we conclude that credible conduct of monetary policy is essential for achieving and maintaining long-term price stability.