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The reduced-form correlation between inflation and measures of real activity has changed substantially for the main developed economies over the post-WWII period. In this paper the authors attempt to describe the observed inflation dynamics in the United Kingdom, the United States and the euro area with a sequence of New Keynesian Phillips Curve (NKPC) equations that are log-linearised around different, non-zero, steady-state inflation levels. In doing this, they follow a two-step estimation strategy. First, they model the time variation in the relationship between inflation and a real cost-based measure of activity through a Markov-switching vector autoregressive model.
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