Adaptive ARFIMA Models with Applications to Inflation

Posted: 3 Mar 2009 Last revised: 9 Jun 2013

See all articles by Claudio Morana

Claudio Morana

Università di Milano Bicocca; Università degli Studi di Milano-Bicocca - Department of Economics, Management and Statistics (DEMS); Università degli Studi di Milano-Bicocca - Center for European Studies (CefES); Center for Economic Research on Pensions and Welfare Policies (CeRP); Rimini Center for Economic Analysis - Europe ETS; Rimini Center for Economic Analysis - HQ

Richard Baillie

Michigan State University - The Eli Broad College of Business and The Eli Broad Graduate School of Management

Date Written: October 11, 2011

Abstract

Many previous analyses of inflation have used either long memory or nonlinear time series models. This paper suggests a simple adaptive modification of the basic ARFIMA model, which uses a Flexible Fourier Form to allow for a time varying intercept. Simulation evidence suggests the model provides a good representation of various forms of structural breaks and also that the new model can be efficiently estimated by a QMLE approach. We investigate monthly CPI inflation series for the G7 countries and find evidence of stable long memory parameters across regimes and also of significant nonlinear effects. The estimated adaptive ARFIMA models generally have less persistent long memory parameters than previous studies, with the estimated time dependent intercept being an important component. The model is also supplemented with an adaptive FIGARCH component, yielding a double nonlinear long memory model.

Keywords: ARFIMA, FIGARCH, long memory, structural change, inflation, G7

JEL Classification: C15, C22

Suggested Citation

Morana, Claudio and Baillie, Richard, Adaptive ARFIMA Models with Applications to Inflation (October 11, 2011). Economic Modelling, Vol. 29, 2012, Available at SSRN: https://ssrn.com/abstract=1352003 or http://dx.doi.org/10.2139/ssrn.1352003

Claudio Morana (Contact Author)

Università di Milano Bicocca ( email )

Dip Economia Metodi Quantitativi Strategie Impresa
Piazza dell'Ateneno Nuovo 1
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Università degli Studi di Milano-Bicocca - Department of Economics, Management and Statistics (DEMS) ( email )

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Milan, 20126
Italy

Università degli Studi di Milano-Bicocca - Center for European Studies (CefES) ( email )

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Viale Piero e Alberto Pirelli, 22
Milano, 20126
Italy

Center for Economic Research on Pensions and Welfare Policies (CeRP) ( email )

Moncalieri, Turin
Italy

Rimini Center for Economic Analysis - Europe ETS ( email )

Piazza Ateneo Nuovo 1
Milan, 20126
Italy

Rimini Center for Economic Analysis - HQ ( email )

900 University Avenue
Riverside, CA 92521
United States

Richard Baillie

Michigan State University - The Eli Broad College of Business and The Eli Broad Graduate School of Management ( email )

East Lansing, MI 48824-1121
United States

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