A key application of long memory time series models concerns inflation. Long memory implies that shocks have a long-lasting effect. It may however be that empirical evidence for long memory is caused by neglecting one or more level shifts. Since such level shifts are not unlikely for inflation, where the shifts may be caused by sudden oil price shocks, we examine whether evidence for long memory (indicated by the relevance of an ARFIMA model) in G7 inflation rates is spurious or exaggerated. Our main findings are that apparent long memory is quite resistant to level shifts, although for a few inflation rates we find that evidence for long memory disappears.

Additional Metadata
Keywords inflation rates, level shifts, long memory time series models
Persistent URL hdl.handle.net/1765/1556
Series Econometric Institute Research Papers
Citation
Franses, Ph.H.B.F, Ooms, M, & Bos, C.S. (1998). Long memory and level shifts: re-analysing inflation rates (No. EI 9811). Econometric Institute Research Papers. Retrieved from http://hdl.handle.net/1765/1556