Long memory with stochastic variance model: A recursive analysis for US inflation
The time series characteristics of postwar US inflation have been found to vary over time. The changes are investigated in a model-based analysis where the time series of inflation is specified by a long memory autoregressive fractionally integrated moving average process with its variance modelled by a stochastic volatility process. Estimates of the parameters are obtained by a Monte Carlo maximum likelihood method. A long sample of monthly core inflation is considered in the analysis as well as subsamples of varying length. The empirical results reveal major changes in the variance, in the order of integration, in the short memory characteristics, and in the volatility of volatility. The findings provide further evidence that the time series properties of inflation are not stable over time.
fractional integration stochastic volatility time varying parameters importance sampling monte carlo simulation