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Structural Changes in Inflation Dynamics: Multiple Breaks at Different Dates for Different Parameters

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  • Eo, Yunjong

Abstract

I consider complicated patterns of structural breaks in postwar quarterly U.S. inflation rates based on the CPI and the GDP deflator over the period from 1953:Q1 to 2013:Q4. Bayesian model selection procedures suggest that the two inflation measures had distinct structural changes in different parameters as well as at different dates. CPI inflation experienced a dramatic drop in persistence around the early 1980s, but GDP deflator inflation remains persistent throughout the postwar sample period. The residual variance for both inflation measures switched from a low volatility regime to a high volatility regime in the early 1970s, but returned to another low volatility regime at different dates: the early 1980s for GDP deflator inflation and the early 1990s for CPI inflation. The residual variance for CPI inflation has increased again since the early 2000s, while GDP deflator inflation has remained less volatile. I do not find evidence of a structural shift in the unconditional mean of either measure of inflation. When reviewing the recent literature, considerable controversy exists over the structural break in inflation persistence around the early 1980s but this appears to be dependent on the measures of inflation, as highlighted by the empirical findings in this paper.

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  • Eo, Yunjong, 2015. "Structural Changes in Inflation Dynamics: Multiple Breaks at Different Dates for Different Parameters," Working Papers 2015-18, University of Sydney, School of Economics, revised Nov 2015.
    • Handle: RePEc:syd:wpaper:2015-18
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    References listed on IDEAS

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    2. Mohitosh Kejriwal & Xuewen Yu & Pierre Perron, 2020. "Bootstrap procedures for detecting multiple persistence shifts in heteroskedastic time series," Journal of Time Series Analysis, Wiley Blackwell, vol. 41(5), pages 676-690, September.
    3. Arnaud Dufays & Jeroen V. K. Rombouts, 2019. "Sparse Change-point HAR Models for Realized Variance," Econometric Reviews, Taylor & Francis Journals, vol. 38(8), pages 857-880, September.
    4. Meligkotsidou, Loukia & Tzavalis, Elias & Vrontos, Ioannis, 2017. "On Bayesian analysis and unit root testing for autoregressive models in the presence of multiple structural breaks," Econometrics and Statistics, Elsevier, vol. 4(C), pages 70-90.
    5. Yunjong Eo & Luis Uzeda & Benjamin Wong, 2023. "Understanding trend inflation through the lens of the goods and services sectors," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 38(5), pages 751-766, August.
    6. Kukacka, Jiri & Sacht, Stephen, 2023. "Estimation of heuristic switching in behavioral macroeconomic models," Journal of Economic Dynamics and Control, Elsevier, vol. 146(C).
    7. Adam Check & Jeremy Piger, 2021. "Structural Breaks in U.S. Macroeconomic Time Series: A Bayesian Model Averaging Approach," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 53(8), pages 1999-2036, December.

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    More about this item

    Keywords

    Bayesian Analysis; Structural Breaks; Multiple-Group Changepoint; Inflation Dynamics; Persistence; UC-SV Model;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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