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Long memory and level shifts: Re-analyzing inflation rates

  • Philip Hans Franses

    (Econometric Institute, Erasmus University Rotterdam, P.O. Box 1738, NL-3000 DR Rotterdam, The Netherlands)

  • Marius Ooms

    (Econometric Institute, Erasmus University Rotterdam, P.O. Box 1738, NL-3000 DR Rotterdam, The Netherlands)

  • Charles S. Bos

    ()

    (Tinbergen Institute, Erasmus University Rotterdam, P.O. Box 1738, NL-3000 DR Rotterdam, The Netherlands)

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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Article provided by Springer in its journal Empirical Economics.

Volume (Year): 24 (1999)
Issue (Month): 3 ()
Pages: 427-449

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Handle: RePEc:spr:empeco:v:24:y:1999:i:3:p:427-449
Note: received: March 1998/final version received: October 1998
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  1. Hassler, Uwe & Wolters, Jurgen, 1995. "Long Memory in Inflation Rates: International Evidence," Journal of Business & Economic Statistics, American Statistical Association, vol. 13(1), pages 37-45, January.
  2. Perron, P, 1988. "The Great Crash, The Oil Price Shock And The Unit Root Hypothesis," Papers 338, Princeton, Department of Economics - Econometric Research Program.
  3. 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.
  4. 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.
  5. Donald W.K. Andrews, 1990. "Tests for Parameter Instability and Structural Change with Unknown Change Point," Cowles Foundation Discussion Papers 943, Cowles Foundation for Research in Economics, Yale University.
  6. 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.
  7. Hidalgo, Javier & Robinson, Peter M., 1996. "Testing for structural change in a long-memory environment," Journal of Econometrics, Elsevier, vol. 70(1), pages 159-174, January.
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