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Long memory and level shifts: re-analysing inflation rates

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Author Info
Franses, Ph.H.B.F.
Ooms, M.
Bos, C.S. (Erasmus Econometric Institute)

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Abstract

A key application of long memory time series models concerns inflation. Long memory implies that shocks have a long-lasting effect. It may however be that empirical evidence for long memory is caused by neglecting one or more level shifts. Since such level shifts are not unlikely for inflation, where the shifts may be caused by sudden oil price shocks, we examine whether evidence for long memory (indicated by the relevance of an ARFIMA model) in G7 inflation rates is spurious or exaggerated. Our main findings are that apparent long memory is quite resistant to level shifts, although for a few inflation rates we find that evidence for long memory disappears.

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File URL: http://hdl.handle.net/1765/1556
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Paper provided by Erasmus University Rotterdam, Econometric Institute in its series Econometric Institute Report with number EI 9811 Revision_Date: 2009-11-06.

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Date of creation: 02 Jul 1998
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Handle: RePEc:dgr:eureir:1765001556

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Keywords: inflation rates; long memory time series models; level shifts;

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References listed on IDEAS
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  1. Sowell, Fallaw, 1992. "Maximum likelihood estimation of stationary univariate fractionally integrated time series models," Journal of Econometrics, Elsevier, vol. 53(1-3), pages 165-188. [Downloadable!] (restricted)
  2. Ooms, Marius & Hassler, Uwe, 1997. "On the effect of seasonal adjustment on the log-periodogram regression," Economics Letters, Elsevier, vol. 56(2), pages 135-141, October. [Downloadable!] (restricted)
  3. Perron, Pierre, 1989. "The Great Crash, the Oil Price Shock, and the Unit Root Hypothesis," Econometrica, Econometric Society, vol. 57(6), pages 1361-1401, November. [Downloadable!] (restricted)
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  4. Perron, Pierre & Vogelsang, Timothy J, 1992. "Testing for a Unit Root in a Time Series with a Changing Mean: Corrections and Extensions," Journal of Business & Economic Statistics, American Statistical Association, vol. 10(4), pages 467-70, October.
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  6. Baillie, Richard T & Chung, Ching-Fan & Tieslau, Margie A, 1996. "Analysing Inflation by the Fractionally Integrated ARFIMA-GARCH Model," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(1), pages 23-40, Jan.-Feb.. [Downloadable!] (restricted)
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  9. Andrews, Donald W K, 1993. "Tests for Parameter Instability and Structural Change with Unknown Change Point," Econometrica, Econometric Society, vol. 61(4), pages 821-56, July. [Downloadable!] (restricted)
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Cited by:
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  1. Eric Hillebrand & Gunther Schnabl & Yasemin Ulu, 2006. "Japanese Foreign Exchange Intervention and the Yen/Dollar Exchange Rate: A Simultaneous Equations Approach Using Realized Volatility," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  2. Cleomar Gomes da Silva & Maria Carolina da Silva Leme, 2008. "Inflation and Interest Rate: Which one is more persistent in Brazil?," Anais do XXXVI Encontro Nacional de Economia [Proceedings of the 36th Brazilian Economics Meeting] 200807181224190, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics]. [Downloadable!]
  3. A.B. Berkelaar & R. Kouwenberg, 1999. "Investing in a real world with mean-reverting inflation," Econometric Institute Report 182, Erasmus University Rotterdam, Econometric Institute. [Downloadable!]
    Other versions:
  4. Elena Andreou & Eric Ghysels, 2001. "Detecting Mutiple Breaks in Financial Market Volatility Dynamics," CIRANO Working Papers 2001s-65, CIRANO. [Downloadable!]
    Other versions:
  5. Vasco J. Gabriel & Luis F. Martins, 2000. "The Forecast Performance of Long Memory and Markov Switching Models," NIPE Working Papers 2/2000, NIPE - Universidade do Minho. [Downloadable!]
  6. Richard T. Baille & Claudio Morana, 2009. "Investigating Inflation Dynamics and Structural Change with an Adaptive ARFIMA Approach," ICER Working Papers - Applied Mathematics Series 06-2009, ICER - International Centre for Economic Research. [Downloadable!]
  7. Stephan Popp, 2008. "A Nonlinear Unit Root Test in the Presence of an Unknown Break," Ruhr Economic Papers 0045, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen. [Downloadable!]
  8. N. Hyung & P.F. Franses, 2002. "Inflation rates," Econometric Institute Report 261, Erasmus University Rotterdam, Econometric Institute. [Downloadable!]
  9. Richard Paap & Philip Hans Franses & Marco Van Der Leij, 2002. "Modelling and forecasting level shifts in absolute returns," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 17(5), pages 601-616. [Downloadable!]
  10. Niels Haldrup & Morten O. Nielsen, 2004. "A Regime Switching Long Memory Model for Electricity Prices," Economics Working Papers 2004-2, School of Economics and Management, University of Aarhus. [Downloadable!]
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  11. Chih-Chiang Hsu, 2000. "Long Memory or Structural Change: Testing Method and Empirical Examination," Econometric Society World Congress 2000 Contributed Papers 0867, Econometric Society. [Downloadable!]
  12. Gadea, Maria & Mayoral, Laura, 2005. "The Persistence of Inflation in OECD Countries: A Fractionally Integrated Approach," MPRA Paper 815, University Library of Munich, Germany. [Downloadable!]
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  13. Guglielmo Maria Caporale & Luis A. Gil-Alana, 2007. "Long Run and Cyclical Dynamics in the US Stock Market," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  14. Charles S. Bos & Philip Hans Franses & Marius Ooms, 2001. "Inflation, Forecast Intervals and Long Memory Regression Models," Tinbergen Institute Discussion Papers 01-029/4, Tinbergen Institute. [Downloadable!]
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  15. G. K. Randolph TAN, 2004. "Long Memory in Import and Export Price Inflation and Persistence of Shocks to the Terms of Trade," Econometric Society 2004 Far Eastern Meetings 732, Econometric Society. [Downloadable!]
  16. M. Ooms & J.A. Doornik, 1999. "Inference and forecasting for fractional autoregressive integrated moving average models; with an application to US and UK inflation," Econometric Institute Report 171, Erasmus University Rotterdam, Econometric Institute. [Downloadable!]
    Other versions:
  17. Haldrup; Niels & Morten Oerregaard Nielsen, 2005. "Directional Congestion and Regime Switching in a Long Memory Model for Electricity Prices," Economics Working Papers 2005-18, School of Economics and Management, University of Aarhus. [Downloadable!]
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  18. Charles S. Bos, 2003. "Time Series Modelling using TSMod 3.24," Tinbergen Institute Discussion Papers 03-091/4, Tinbergen Institute. [Downloadable!]
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  19. Haldrup, Niels & Nielsen, Morten Oe., . "Estimation of Fractional Integration in the Presence of Data Noise," Economics Working Papers 2003-10, School of Economics and Management, University of Aarhus. [Downloadable!]
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  20. Guglielmo Maria Caporale & Luis A. Gil-Alana, 2009. "Multi-Factor Gegenbauer Processes and European Inflation Rates," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  21. Claudio Morana, 2000. "Measuring core inflation in the Euro area," Working Paper Series 36, European Central Bank. [Downloadable!]
  22. Claudio Morana & Fabio Cesare Bagliano, 2007. "Inflation and monetary dynamics in the USA: a quantity-theory approach," Applied Economics, Taylor and Francis Journals, vol. 39(2), pages 229-244, February. [Downloadable!] (restricted)
  23. C.S. Bos & S.J. Koopman & M. Ooms, 2007. "Long Memory Modelling of Inflation with Stochastic Variance and Structural Breaks," Tinbergen Institute Discussion Papers 07-099/4, Tinbergen Institute. [Downloadable!]
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  24. Mohamed Boutahar & Gilles Dufrénot & Anne Péguin-Feissolle, 2008. "A Simple Fractionally Integrated Model with a Time-varying Long Memory Parameter d t ," Computational Economics, Springer, vol. 31(3), pages 225-241, April. [Downloadable!] (restricted)
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