IDEAS home Printed from https://ideas.repec.org/a/nrb/journl/v25y2013i2p66.html
   My bibliography  Save this article

Time-Varying Parameters of Inflation Model in Nepal: State Space Modeling

Author

Listed:
  • T.P.Koirala, Ph.D.

    (Nepal Rastra Bank, Research Department)

Abstract

This paper attempts to investigate the stability of time-varying parameters of the random walk model of inflation in Nepal. This study has been motivated with the Lucas Critique (1976) that the monetary/fiscal policy that is exposed to change over time affect the expectations of forward looking economic agents which hence lead to non-constant time-varying parameters of the model. Monthly time series of inflation ranging from August, 1997 to July, 2012 has been utilized for the analysis. Applying the Kalman Filter technique for the estimation of coefficients of random walk model, we found non-constant time varying parameters of both the constant and autoregressive of order one AR(1) coefficient of inflation over the long run. The changes in the expectations of rational economic agents on macroeconomic policies as a result of the problems of policy commitment, credibility and dynamic consistency might have attributed such non-constant time-varying parameters. Therefore, in addition to supply smoothing policies to control inflation in Nepal, consistent and credible policies that are not exposed to change over time may reduce the gap of actual inflation from its targets and hence trigger inflation into desired level.

Suggested Citation

  • T.P.Koirala, Ph.D., 2013. "Time-Varying Parameters of Inflation Model in Nepal: State Space Modeling," NRB Economic Review, Nepal Rastra Bank, Economic Research Department, vol. 25(2), pages 66-77, October.
    • Handle: RePEc:nrb:journl:v:25:y:2013:i:2:p:66
    as

    Download full text from publisher

    File URL: https://www.nrb.org.np/contents/uploads/2022/12/vol25-2_art4.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Fuhrer, Jeffrey C, 1997. "The (Un)Importance of Forward-Looking Behavior in Price Specifications," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(3), pages 338-350, August.
    2. R. H. Shumway & D. S. Stoffer, 1982. "An Approach To Time Series Smoothing And Forecasting Using The Em Algorithm," Journal of Time Series Analysis, Wiley Blackwell, vol. 3(4), pages 253-264, July.
    3. Roberts John M., 2005. "How Well Does the New Keynesian Sticky-Price Model Fit the Data?," The B.E. Journal of Macroeconomics, De Gruyter, vol. 5(1), pages 1-39, September.
    4. Shanken, Jay, 1990. "Intertemporal asset pricing : An Empirical Investigation," Journal of Econometrics, Elsevier, vol. 45(1-2), pages 99-120.
    5. James H. Stock & Mark W. Watson, 1993. "Business Cycles, Indicators, and Forecasting," NBER Books, National Bureau of Economic Research, Inc, number stoc93-1, May.
    6. T. R. Bishnoi & T. P. Koirala, 2006. "Stability and Robustness of Inflation Model of Nepal: An Econometric Analysis," Journal of Quantitative Economics, Springer;The Indian Econometric Society (TIES), vol. 4(2), pages 114-129, July.
    7. Stock, James H. & Watson, Mark W. (ed.), 1993. "Business Cycles, Indicators, and Forecasting," National Bureau of Economic Research Books, University of Chicago Press, edition 1, number 9780226774886, December.
    8. Hamilton, James D., 1988. "Rational-expectations econometric analysis of changes in regime : An investigation of the term structure of interest rates," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 385-423.
    9. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
    10. James H. Stock & Mark W. Watson, 1993. "Introduction to "Business Cycles, Indicators and Forecasting"," NBER Chapters, in: Business Cycles, Indicators, and Forecasting, pages 1-10, National Bureau of Economic Research, Inc.
    11. Friedman, Benjamin M., 1979. "Optimal expectations and the extreme information assumptions of `rational expectations' macromodels," Journal of Monetary Economics, Elsevier, vol. 5(1), pages 23-41, January.
    12. Taylor, John B, 1975. "Monetary Policy during a Transition to Rational Expectations," Journal of Political Economy, University of Chicago Press, vol. 83(5), pages 1009-1021, October.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. T.P.Koirala Ph.D., 2013. "Time-Varying Parameters of Inflation Model in Nepal: State Space Modeling," NRB Economic Review, Nepal Rastra Bank, Research Department, vol. 25(2), pages 66-77, October.
    2. repec:nrb:wpaper:nrbwp162013 is not listed on IDEAS
    3. T.P. Koirala Ph.D., 2013. "Time-varying Parameters of Inflation Model in Nepal: State Space Modeling," NRB Working Paper 16/2013, Nepal Rastra Bank, Research Department.
    4. Huh, Chan G. & Lansing, Kevin J., 2000. "Expectations, credibility, and disinflation in a small macroeconomic model," Journal of Economics and Business, Elsevier, vol. 52(1-2), pages 51-86.
    5. Christopher L. Gilbert & Duo Qin, 2007. "Representation in Econometrics: A Historical Perspective," Working Papers 583, Queen Mary University of London, School of Economics and Finance.
    6. Grace Lee, 2011. "Aggregate shocks decomposition for eight East Asian countries," Journal of the Asia Pacific Economy, Taylor & Francis Journals, vol. 16(2), pages 215-232.
    7. Catherine Doz & Peter Fuleky, 2019. "Dynamic Factor Models," Working Papers 2019-4, University of Hawaii Economic Research Organization, University of Hawaii at Manoa.
    8. Christopher L. Gilbert & Duo Qin, 2007. "Representation in Econometrics: A Historical Perspective," Working Papers 583, Queen Mary University of London, School of Economics and Finance.
    9. Catherine Doz & Peter Fuleky, 2019. "Dynamic Factor Models," PSE Working Papers halshs-02262202, HAL.
    10. Catherine Doz & Peter Fuleky, 2019. "Dynamic Factor Models," Working Papers halshs-02262202, HAL.
    11. DAVID E. ALLEN & MICHAEL McALEER & ROBERT J. POWELL & ABHAY K. SINGH, 2018. "Non-Parametric Multiple Change Point Analysis Of The Global Financial Crisis," Annals of Financial Economics (AFE), World Scientific Publishing Co. Pte. Ltd., vol. 13(02), pages 1-23, June.
    12. Hendry, David F. & Clements, Michael P., 2003. "Economic forecasting: some lessons from recent research," Economic Modelling, Elsevier, vol. 20(2), pages 301-329, March.
    13. Tsai, Bi-Huei & Chang, Chih-Jen & Chang, Chun-Hsien, 2016. "Elucidating the consumption and CO2 emissions of fossil fuels and low-carbon energy in the United States using Lotka–Volterra models," Energy, Elsevier, vol. 100(C), pages 416-424.
    14. Sergey V. Smirnov & Nikolay V. Kondrashov & Anna V. Petronevich, 2017. "Dating Cyclical Turning Points for Russia: Formal Methods and Informal Choices," Journal of Business Cycle Research, Springer;Centre for International Research on Economic Tendency Surveys (CIRET), vol. 13(1), pages 53-73, May.
    15. Kevin Lansing, 2009. "Time Varying U.S. Inflation Dynamics and the New Keynesian Phillips Curve," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 12(2), pages 304-326, April.
    16. Tobias Hartl & Roland Jucknewitz, 2022. "Approximate state space modelling of unobserved fractional components," Econometric Reviews, Taylor & Francis Journals, vol. 41(1), pages 75-98, January.
    17. Mankiw, N Gregory & Miron, Jeffrey A & Weil, David N, 1987. "The Adjustment of Expectations to a Change in Regime: A Study of the Founding of the Federal Reserve," American Economic Review, American Economic Association, vol. 77(3), pages 358-374, June.
    18. Chris Birchenhall & Denise Osborn & Marianne Sensier, 2001. "Predicting UK Business Cycle Regimes," Scottish Journal of Political Economy, Scottish Economic Society, vol. 48(2), pages 179-195, May.
    19. Magnus Reif, 2020. "Macroeconomics, Nonlinearities, and the Business Cycle," ifo Beiträge zur Wirtschaftsforschung, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, number 87.
    20. McCracken,M.W. & West,K.D., 2001. "Inference about predictive ability," Working papers 14, Wisconsin Madison - Social Systems.
    21. J.D. Hollingworth, 1997. "Leading Indicators of Australian Recessions: Part 2," Economics Discussion / Working Papers 97-17, The University of Western Australia, Department of Economics.

    More about this item

    Keywords

    Inflation; State Space Model; Random Walk Model; Kalman Filter;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nrb:journl:v:25:y:2013:i:2:p:66. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Publication Division NRB (email available below). General contact details of provider: https://edirc.repec.org/data/nrbgvnp.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.