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

Author

Listed:
  • Grassi Stefano

    (Università degli Studi di Roma Tor Vergata)

  • Proietti Tommaso

    (Università degli Studi di Roma Tor Vergata)

Abstract

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.

Suggested Citation

  • Grassi Stefano & Proietti Tommaso, 2010. "Has the Volatility of U.S. Inflation Changed and How?," Journal of Time Series Econometrics, De Gruyter, vol. 2(1), pages 1-22, September.
  • Handle: RePEc:bpj:jtsmet:v:2:y:2010:i:1:n:6
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    References listed on IDEAS

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    Cited by:

    1. Nonejad, Nima, 2015. "Flexible model comparison of unobserved components models using particle Gibbs with ancestor sampling," Economics Letters, Elsevier, vol. 133(C), pages 35-39.
    2. Elmar Mertens & James M Nason, 2015. "Inflation and Professional Forecast Dynamics: An Evaluation of Stickiness, Persistence, and Volatility," CAMA Working Papers 2015-06, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    3. Stefano Grassi & Nima Nonejad & Paolo Santucci de Magistris, 2014. "Forecasting with the Standardized Self-Perturbed Kalman Filter," Studies in Economics 1405, School of Economics, University of Kent.
    4. Bouakez, Hafedh & Essid, Badye & Normandin, Michel, 2013. "Stock returns and monetary policy: Are there any ties?," Journal of Macroeconomics, Elsevier, vol. 36(C), pages 33-50.
    5. Eric Eisenstat & Rodney W. Strachan, 2016. "Modelling Inflation Volatility," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 31(5), pages 805-820, August.
    6. Christine Garnier & Elmar Mertens & Edward Nelson, 2015. "Trend Inflation in Advanced Economies," International Journal of Central Banking, International Journal of Central Banking, vol. 11(4), pages 65-136, September.
    7. Nonejad Nima, 2016. "Particle Markov Chain Monte Carlo Techniques of Unobserved Component Time Series Models Using Ox," Journal of Time Series Econometrics, De Gruyter, vol. 8(1), pages 55-90, January.
    8. Nonejad, Nima, 2014. "Particle Markov Chain Monte Carlo Techniques of Unobserved Component Time Series Models Using Ox," MPRA Paper 55662, University Library of Munich, Germany.
    9. Henzel, Steffen R., 2013. "Fitting survey expectations and uncertainty about trend inflation," Journal of Macroeconomics, Elsevier, vol. 35(C), pages 172-185.
    10. Nima Nonejad, 2013. "Particle Markov Chain Monte Carlo Techniques of Unobserved Component Time Series Models Using Ox," CREATES Research Papers 2013-27, Department of Economics and Business Economics, Aarhus University.
    11. Jacek Kwiatkowski, 2010. "Unobserved Component Model for Forecasting Polish Inflation," Dynamic Econometric Models, Uniwersytet Mikolaja Kopernika, vol. 10, pages 121-129.

    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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