Inflation Volatility with Regime Switching

• Autores: Maksim A. Isakin, Phuong V. Ngo
• Localización: Oxford bulletin of economics and statistics, ISSN 0305-9049, Vol. 81, Nº. 6, 2019, págs. 1362-1375
• Idioma: inglés
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• Resumen

  • This paper presents a new approach to model U.S. inflation dynamics by allowing regime switching in an unobserved components stochastic volatility framework. We use a modified particle filter to construct likelihood and estimate the model using MLE. The number of regimes is determined based on a bootstrap. We find that a model with three regimes and regime‐dependent constant volatilities has superior performance. In addition, we show that since 2000:II, U.S. inflation has entered a regime with moderate volatility where most of the volatility comes from transitory shocks.