For the United States, we assume a target inflation rate of 2.5 per cent, which is consistent with the Federal Reserve’s mandate to maintain price stability and is close to the average inflation rate within the sample. What is striking about these series is that, for the most part, they look more like trendstationary series than difference-stationary ones, with swings around a flattish line. The three exceptions are: Japan, which is not altogether surprising given that is was mired in deflation for much of the period; New Zealand, where inflation has systematically averaged above the mid-point of the target range; and Sweden, where the opposite is true. But for both New Zealand and Sweden, the behaviour is still more characteristic of trend stationarity than difference stationarity. Table 2 reports some formal (Augmented Dickey-Fuller) statistical tests of difference stationarity for these eight jurisdictions over the period 1993 Q4 to 2010 Q1 (excluding the euro area, where the tests run from the inception of the euro). The dependent variable is the change in the deviation of (the logarithm of) the target measure of prices from a path along which the price level grows at a rate corresponding to the central bank’s inflation objective. The regressors include a constant, a trend, 10 two lagged values of the dependant variable and the lagged level of the variable of interest, which should attract a zero coefficient if and only if the series is stationary in differences.

30  BIS Review 111/2010  Chart 2 Macroeconomic Volatility Measures  United States 7  6  5  4  3  2  1  0 1966  1970  1974  1978  1982  1986  1990  1994  1998  2002  2006  2010  United Kingdom 7  6  5  4  3  2  1  0 1966  1970  BIS Review 111/2010  1974  1978  1982  1986  1990  1994  1998  2002  2006  2010  31  32  Chart 3a Impulse Responses for United States United States  Volatility shock Supply shock  Demand shock Credit demand shock Credit supply shock  BIS Review 111/2010  Monetary policy shock House price shock  Macrovolatility  Inflation  GDP growth  Change in bond spread  Real credit growth  Policy rate  House price inflation  Chart 3b BIS Review 111/2010  Impulse Responses for United Kingdom United Kingdom  Volatility shock  Supply shock  Demand shock Credit demand shock Credit supply shock Monetary policy shock House price shock  Macrovolatility  Inflation  GDP growth  Change in bond spread  Real credit growth  Policy rate  House price inflation  33  Chart 4a Historical Decompositions: United States Real credit growth (ann %)  Real house price inflation (ann %) 15  15  10  10  5  5  0  0  ‐5  ‐5  ‐10  ‐10 ‐15  ‐15 1970  1974  1978  1982  1986  1990  1994  1998  2002  2006  2010  1970  1974  1978  Federal Funds rate (%)  1982  1986  1990  1994  1998  2002  2006  2010  GDP growth (ann %) 20  10 8  15  6 10  4 2  5  0 0  ‐2 ‐4  ‐5  ‐6 ‐10 1970  1974  1978  1982  1986  1990  1994  1998  2002  2006  2010  ‐8 1970  1974  1978  1982  1986  1990  1994  1998  2002  2006  2010  Legend:1 Trend Aggregate demand and supply shocks Credit market shocks  Macro volatility shock Monetary policy shock House price shock  1  Aggregate demand and supply shocks” is the net impact of the aggregate demand shock and the aggregate supply shock.