Long Memory Modelling of Inflation with Stochastic Variance and Structural Breaks

Tinbergen Institute Discussion Paper No. 2007-099/4

CREATES Research Paper No. 2007-44

29 Pages Posted: 11 Jan 2008  

Charles S. Bos

VU University Amsterdam

Siem Jan Koopman

VU University Amsterdam; Tinbergen Institute

Marius Ooms

VU University Amsterdam - Department of Econometrics

Date Written: December 21, 2007

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.

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

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

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: https://ssrn.com/abstract=1082705 or http://dx.doi.org/10.2139/ssrn.1082705

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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