Inflation Volatility with Regime Switching

14 Pages Posted: 2 Jun 2020

See all articles by Maksim Isakin

Maksim Isakin

Cleveland State University

Phuong Ngo

Cleveland State University

Date Written: December 2019

Abstract

This paper presents a new approach to model U.S. inflation dynamics by allowing regime switching in an unobserved components stochastic volatility framework. We use a modified particle filter to construct likelihood and estimate the model using MLE. The number of regimes is determined based on a bootstrap. We find that a model with three regimes and regime‐dependent constant volatilities has superior performance. In addition, we show that since 2000:II, U.S. inflation has entered a regime with moderate volatility where most of the volatility comes from transitory shocks.

Suggested Citation

Isakin, Maksim and Ngo, Phuong, Inflation Volatility with Regime Switching (December 2019). Oxford Bulletin of Economics and Statistics, Vol. 81, Issue 6, pp. 1362-1375, 2019, Available at SSRN: https://ssrn.com/abstract=3615230 or http://dx.doi.org/10.1111/obes.12313

Maksim Isakin (Contact Author)

Cleveland State University ( email )

Cleveland, OH 44115
United States
216.687.4530 (Phone)

Phuong Ngo

Cleveland State University

Cleveland, OH 44115
United States

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