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Modeling U.S. Inflation Dynamics: A Bayesian Nonparametric Approach

Lookup NU author(s): Dr Markus Jochmann

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Abstract

The properties of the inflation process and especially possible changes in its persistence have received much attention in the literature. However, empirical evidence is ambiguous. Some studies find that inflation persistence varied over time, others conclude it was constant. This article contributes further evidence to this ongoing debate by modeling U.S. inflation dynamics using a sticky infinite hidden Markov model (sticky IHMM). The sticky IHMM is a Bayesian nonparametric approach to modeling structural breaks. It allows for an unknown number of breakpoints and is a flexible and attractive alternative to existing methods. We found that inflation persistence was highest in 1973-74 and then again around 1980. However, credible intervals for our estimates of inflation persistence were very wide. Thus, a substantial amount of uncertainty about this aspect of inflation dynamics remained.

Publication metadata

Author(s): Jochmann M

Publication type: Article

Publication status: Published

Journal: Econometric Reviews

Year: 2015

Volume: 34

Issue: 5

Pages: 537-558

Print publication date: 01/01/2015

Online publication date: 10/11/2014

Acceptance date: 05/06/2014

Date deposited: 28/02/2018

ISSN (print): 0747-4938

ISSN (electronic): 1532-4168

Publisher: Taylor & Francis

URL: http://dx.doi.org/10.1080/07474938.2013.806199

DOI: 10.1080/07474938.2013.806199

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