Second Order Time Dependent Inflation Persistence in the United States: a GARCH-in-Mean Model with Time Varying Coefficients

EST Working Paper Series, University of Turin

33 Pages Posted: 12 Feb 2020

See all articles by Alessandra Canepa

Alessandra Canepa

University of Turin

Menelaos Karanasos

Brunel University London - Economics and Finance

Alexandros Paraskevopoulos

The Center for Research and Applications of Nonlinear Systems (CRANS) Department of Mathematics, Division of Applied Analysis, University of Patras

Date Written: April 23, 2019

Abstract

In this paper we investigate the behavior of inflation persistence in the United States. To model inflation we estimate an autoregressive GARCH-in-mean model with variable coefficients and we propose a new measure of second-order time varying persistence, which not only distinguishes between changes in the dynamics of inflation and its volatility, but it also allows for feedback from nominal uncertainty to inflation. Our empirical results suggest that inflation persistence in the United States is best described as unchanged. Another important result relates to the Monte Carlo experiment evidence which reveal that if the model is misspecified, then commonly used unit root tests will misclassify inflation of being a nonstationary, rather than a stationary process.

Keywords: Inflation persistence, GARCH-in Mean, structural breaks, Monte Carlo simulations, optimal forecasts

JEL Classification: C13, C22, C32, E17, E31, E5

Suggested Citation

Canepa, Alessandra and Karanasos, Menelaos and Paraskevopoulos, Alexandros, Second Order Time Dependent Inflation Persistence in the United States: a GARCH-in-Mean Model with Time Varying Coefficients (April 23, 2019). EST Working Paper Series, University of Turin , Available at SSRN: https://ssrn.com/abstract=3521144 or http://dx.doi.org/10.2139/ssrn.3521144

Alessandra Canepa (Contact Author)

University of Turin ( email )

Lungo Dora Siena, 100 A,
University of Turin
Torino, TO 10153
Italy

Menelaos Karanasos

Brunel University London - Economics and Finance ( email )

Uxbridge UB8 3PH
United Kingdom

Alexandros Paraskevopoulos

The Center for Research and Applications of Nonlinear Systems (CRANS) Department of Mathematics, Division of Applied Analysis, University of Patras ( email )

Patra
Greece

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