Autore:
Canepa, Alessandra
Titolo:
Ination Dynamics and Time-Varying Persistence: The Importance of the Uncertainty Channel. Periodico:
Università degli studi di Torino. Dip. Di Economia e Statistica Cognetti de Martiis. Working paper seriesAnno:
2022 - Volume:
4 - Fascicolo:
11 - Pagina iniziale:
1 - Pagina finale:
32In this article, we employ a time-varying GARCH-type specification to model inflation and investigate the behaviour of its persistence. Specifically, by modelling the inflation series as AR(1)-APARCH(1,1)-in-mean-level process with breaks, we show that persistence is transmitted from the
conditional variance to the conditional mean. Hence, by studying the conditional mean/variance independently, one will obtain a biased estimate of the true degree of persistence. Accordingly, we propose a new measure of time-varying persistence, which not only distinguishes between changes in
the dynamics of inflation and its volatility but also allows for feedback between the two variables.
Analysing the inflation series for a number of countries, we find evidence that inflation uncertainty plays an important role in shaping expectations, and a higher level of uncertainty increases inflation
persistence. We also consider a number of unit root tests and present the results of a Monte Carlo experiment to investigate the size and power properties of these tests in the presence of breaks in the mean and the variance equation of an AR(1)-APARCH(1,1)-in-mean-level data generating process.
The Monte Carlo experiment reveals that if the model is misspecified, then commonly used unit root tests will misclassify inflation as a nonstationary, rather than a stationary process.
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