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Has the Volatility of U.S. Inflation Changed and How?

  • Grassi Stefano

    (Università degli Studi di Roma Tor Vergata)

  • Proietti Tommaso

    (Università degli Studi di Roma Tor Vergata)

The local level model with stochastic volatility, recently proposed for U.S. Inflation by Stock and Watson (“Why Has U.S. Inflation Become Harder to Forecast?”, Journal of Money, Credit and Banking, Supplement to Vol. 39, No. 1, February 2007), provides a simple yet sufficiently rich framework for characterizing the evolution of the main stylized facts concerning the U.S. inflation. The model decomposes inflation into a permanent component, evolving as a random walk, and a transitory component. The volatility of the disturbances driving both components is allowed to vary over time. The paper provides a full Bayesian analysis of this model and readdresses some of the main issues that were raised by the literature concerning the evolution of persistence and predictability and the extent and timing of the great moderation. The assessment of various nested models of inflation volatility and systematic model selection provide strong evidence in favor of a model with heteroscedastic disturbances in the permanent component, whereas the transitory component has time invariant size. The main evidence is that the great moderation is over, and that volatility, persistence and predictability of inflation underwent a turning point around 1995. During the last decade, volatility and persistence have been increasing and predictability has been going down.

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Article provided by De Gruyter in its journal Journal of Time Series Econometrics.

Volume (Year): 2 (2010)
Issue (Month): 1 (September)
Pages: 1-22

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Handle: RePEc:bpj:jtsmet:v:2:y:2010:i:1:n:6
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  1. Pivetta, Frederic & Reis, Ricardo, 2007. "The persistence of inflation in the United States," Journal of Economic Dynamics and Control, Elsevier, vol. 31(4), pages 1326-1358, April.
  2. Chib S. & Jeliazkov I., 2001. "Marginal Likelihood From the Metropolis-Hastings Output," Journal of the American Statistical Association, American Statistical Association, vol. 96, pages 270-281, March.
  3. Sangjoon Kim & Neil Shephard & Siddhartha Chib, 1996. "Stochastic Volatility: Likelihood Inference And Comparison With Arch Models," Econometrics 9610002, EconWPA.
  4. repec:dgr:uvatin:20070099 is not listed on IDEAS
  5. Timothy Cogley & Giorgio E. Primiceri & Thomas J. Sargent, 2010. "Inflation-Gap Persistence in the US," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(1), pages 43-69, January.
  6. Charles S. Bos & Siem Jan Koopman & Marius Ooms, 2007. "Long memory modelling of inflation with stochastic variance and structural breaks," CREATES Research Papers 2007-44, School of Economics and Management, University of Aarhus.
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