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Effect of Moments on Aggregation and Long Memory in Inflation

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  • Kenneth Hightower
  • Taner M. Yigit

Abstract

There are two crucial conditions for cross-sectional aggregation of AR(1) parameters to produce long memory: 1) heterogeneity and 2) proximity to the unit root. We analyze role of moments, namely the mean and variance, of the distribution of the AR(1) coefficients in generating long memory. The positive relation between these moments and the order of integration suggests that the degree of fractional integration should decrease with a lower mean or variance. We investigate this result by first modeling long memory in inflation as a result of the aggregation of individual inflation expectations and then showing how the adoption of inflation targeting decreases the memory length in seven countries due to its moderating effect on individual inflation expectatio

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Bibliographic Info

Paper provided by Econometric Society in its series Econometric Society 2004 Australasian Meetings with number 72.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:ausm04:72

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Keywords: Long Memory; Heterogeneous Inflation Expectations; Inflation Targeting;

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  1. Granger, C. W. J., 1980. "Long memory relationships and the aggregation of dynamic models," Journal of Econometrics, Elsevier, Elsevier, vol. 14(2), pages 227-238, October.
  2. Francis X. Diebold & Atsushi Inoue, 2000. "Long Memory and Regime Switching," NBER Technical Working Papers 0264, National Bureau of Economic Research, Inc.
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  12. Christopher F. Baum & John Barkoulas & Mustafa Caglayan, 1996. "Persistence in International Inflation Rates," Boston College Working Papers in Economics, Boston College Department of Economics 333., Boston College Department of Economics.
  13. Liu, Ming, 2000. "Modeling long memory in stock market volatility," Journal of Econometrics, Elsevier, Elsevier, vol. 99(1), pages 139-171, November.
  14. Figlewski, Stephen & Wachtel, Paul, 1981. "The Formation of Inflationary Expectations," The Review of Economics and Statistics, MIT Press, vol. 63(1), pages 1-10, February.
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  17. Baillie, Richard T., 1996. "Long memory processes and fractional integration in econometrics," Journal of Econometrics, Elsevier, Elsevier, vol. 73(1), pages 5-59, July.
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