Structural Breaks in the International Dynamics of Inflation

Abstract

This paper proposes an iterative procedure to discriminate between structural breaks in the coefficients and the disturbance covariance matrix of a system of equations, with recursive procedures then identifying individual coefficient shifts and separating volatility from correlation breaks. Structural breaks in short-term cross-country inflation relations are then examined for major G-7 economies and within the euro area. There is evidence that the euro area leads inflation in North America, while changing short-term interactions apply within the euro area. Covariability generally increases from the late 1990s, while euro-area countries move from essentially idiosyncratic contemporaneous variation to comovement in the 1980s.

Trends and prospects of the world oil market

“…This paper extends the structural break methodology of Bataa, Osborn, Sensier and van Dijk (2013), which iteratively tests for coefficient and covariance breaks that may occur at different time points, to examine changes in an SVAR model of the global oil market. The extension relies on single equation methods and can be employed in any structural model identified through contemporaneous causal ordering restrictions.…”

“…Although heteroskedasticity consistent inference is used in the initialization of the procedure to detect possible coefficient breaks, subsequent iterations employ appropriate GLS-transformed data, based on residual variance estimates that incorporate breaks. The procedure allows coefficient and variance breaks to be estimated and dated separately, and the simulations of Bataa, Osborn, Sensier and van Dijk (2013) show it generally works well.…”

“…Against this background, the present paper uses recent developments in the literature on structural break testing to examine changes in the nature of demand and supply shocks in the oil market through the model proposed by Kilian (2009). Specifically, we extend and apply the methodology of Bataa, Osborn, Sensier and van Dijk (2013), that allows separate estimation of coefficient, volatility and correlation breaks in a VAR framework, to an SVAR context. Since the procedure is quite flexible in permitting different break dates to apply in different parts of the model, we allow the data to inform us whether and how parameters have changed over time.…”

“…An important implication of the analysis of Baumeister and Peersman (2013b) is that the 2 SVAR coefficients and the volatilities of shocks in this market may change at different dates, which we allow by extending the testing approach of Bataa, Osborn, Sensier and van Dijk (2013) to the SVAR context. Our extension is very flexible, since (in a recursive specification) each equation can be considered separately.…”

What is the Globalisation of Inflation?

“…Papers which document such a link between domestic and international inflation include Ciccarelli and Mojon (2010), Neely and Rapach (2011), Mumtaz and Surico (2012), Eichmeier and Pijenburg (2013), Bataa, Osborn, Sensier and van Dijk (2013), Förster and Tillman (2014). Based on this evidence, and even in the context of the large economies of the US and Euro area, Bernanke (2007) and Trichet (2008), respectively, emphasise the need for central banks to monitor carefully international price developments and analyse their implications for the domestic economy.…”