Inflation Volatility with Regime Switching

Maksim Isakin and Phuong V. Ngo

Oxford Bulletin of Economics and Statistics, 2019, vol. 81, issue 6, 1362-1375

Abstract: 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.

Date: 2019
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