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Long Memory Modelling of Inflation with Stochastic Variance and Structural Breaks


Charles S. Bos


VU University Amsterdam

Siem Jan Koopman


VU University Amsterdam; Tinbergen Institute

Marius Ooms


VU University Amsterdam - Department of Econometrics

December 21, 2007

Tinbergen Institute Discussion Paper No. 2007-099/4
CREATES Research Paper No. 2007-44

Abstract:     
We investigate changes in the time series characteristics of postwar U.S. inflation. In a model-based analysis the conditional mean of inflation is specified by a long memory autoregressive fractionally integrated moving average process and the conditional variance is modelled by a stochastic volatility process. We develop a Monte Carlo maximum likelihood method to obtain efficient estimates of the parameters using a monthly dataset of core inflation for which we consider different subsamples of varying size. Based on the new modelling framework and the associated estimation technique, we find remarkable changes in the variance, in the order of integration, in the short memory characteristics and in the volatility of volatility.

Number of Pages in PDF File: 29

Keywords: Time varying parameters, Importance sampling, Monte Carlo simulation, Stochastic Volatility, Fractional Integration

JEL Classification: C15, C32, C51, E23, E31

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Date posted: January 11, 2008  

Suggested Citation

Bos, Charles S. and Koopman, Siem Jan and Ooms, Marius, Long Memory Modelling of Inflation with Stochastic Variance and Structural Breaks (December 21, 2007). Tinbergen Institute Discussion Paper No. 2007-099/4; CREATES Research Paper No. 2007-44. Available at SSRN: http://ssrn.com/abstract=1082705 or http://dx.doi.org/10.2139/ssrn.1082705

Contact Information

Charles S. Bos (Contact Author)
VU University Amsterdam ( email )
De Boelelaan 1105
1081 HV Amsterdam
Netherlands
HOME PAGE: http://personal.vu.nl/c.s.bos
Siem Jan Koopman
VU University Amsterdam ( email )
De Boelelaan 1105
1081 HV Amsterdam
Netherlands
+31205986019 (Phone)
HOME PAGE: http://personal.vu.nl/s.j.koopman
Tinbergen Institute ( email )
Gustav Mahlerplein 117
1082 MS Amsterdam
Netherlands
HOME PAGE: http://personal.vu.nl/s.j.koopman
Marius Ooms
VU University Amsterdam - Department of Econometrics ( email )
De Boelelaan 1105
1081 HV Amsterdam
Netherlands
+31 20 4446023 (Phone)
+31 20 4446020 (Fax)
HOME PAGE: http://econometriclinks.com
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