A new structural break model,with an application to Canadian inflation forecasting |
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Authors: | John M. Maheu Yong Song |
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Affiliation: | 1. DeGroote School of Business, McMaster University, 1280 Main Street West, Hamilton, ON, Canada, L8S 4M4;2. RCEA, Italy;3. Economics Discipline Group, University of Technology, Sydney, Australia |
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Abstract: | This paper develops an efficient approach to modelling and forecasting time series data with an unknown number of change-points. Using a conjugate prior and conditioning on time-invariant parameters, the predictive density and the posterior distribution of the change-points have closed forms. Furthermore, the conjugate prior is modeled as hierarchical in order to exploit the information across regimes. This framework allows breaks in the variance, the regression coefficients, or both. The regime duration can be modelled as a Poisson distribution. A new, efficient Markov chain Monte Carlo sampler draws the parameters from the posterior distribution as one block. An application to a Canadian inflation series shows the gains in forecasting precision that our model provides. |
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Keywords: | Multiple change-points Regime duration Inflation targeting Predictive density MCMC |
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