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Investigating Inflation Dynamics and Structural Change with an Adaptive ARFIMA Approach

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  • Richard T. Baille
  • Claudio Morana

    ()

Abstract

Previous models of monthly CPI inflation time series have focused on possible regime shifts, non-linearities and the feature of long memory. This paper proposes a new time series model, named Adaptive ARFIMA; which appears well suited to describe inflation and potentially other economic time series data. The Adaptive ARFIMA model includes a time dependent intercept term which follows a Flexible Fourier Form. The model appears to be capable of succesfully dealing with various forms of breaks and discontinities in the conditional mean of a time series. Simulation evidence justifies estimation by approximate MLE and model specfication through robust inference based on QMLE. The Adaptive ARFIMA model when supplemented with conditional variance models is found to provide a good representation of the G7 monthly CPI inflation series.

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File URL: http://www.icer.it/docs/wp2009/ICERwp06-09.pdf
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Bibliographic Info

Paper provided by ICER - International Centre for Economic Research in its series ICER Working Papers - Applied Mathematics Series with number 06-2009.

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Length: 15 pages
Date of creation: May 2009
Date of revision:
Handle: RePEc:icr:wpmath:06-2009

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Keywords: ARFIMA; FIGARCH; long memory; structural change; inflation; G7.;

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References

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  1. Baillie, Richard T. & Kapetanios, George, 2007. "Testing for Neglected Nonlinearity in Long-Memory Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 25, pages 447-461, October.
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  13. Morana Claudio, 2002. "Common Persistent Factors in Inflation and Excess Nominal Money Growth and a New Measure of Core Inflation," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 6(3), pages 1-40, November.
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  16. Hyung, Namwon & Franses, Philip Hans & Penm, Jack, 2006. "Structural breaks and long memory in US inflation rates: Do they matter for forecasting?," Research in International Business and Finance, Elsevier, vol. 20(1), pages 95-110, March.
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Cited by:
  1. de Figueiredo, Erik Alencar, 2010. "Dynamics of regional unemployment rates in Brazil: Fractional behavior, structural breaks, and Markov switching," Economic Modelling, Elsevier, vol. 27(5), pages 900-908, September.

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