#09-01 -- Emmanuelle Piérard
#09-02 -- Matthew Doyle and Barry Falk (James Madison University)
When the central banker’s loss function is asymmetric, changes in the volatility of inflation and/or unemployment affect equilibrium inflation. This suggests that changing macroeconomic volatilities may be an important driving force behind trends in observed inflation. Previous evidence, which has offered support for this idea, suffers from a spurious regression problem. Once this problem is controlled for, the evidence suggests that the volatility of unemployment does not help explain inflation outcomes. There is some evidence of a relationship between inflation and its volatility, but overall the data does not support the view that changing economic volatility, as filtered through asymmetric central bank preferences, is an important driver of inflation trends.
Journal of Economic Literature (JEL) classification
Inflation, monetary policy, asymmetric loss
#09-03 -- Dinghai Xu
This paper investigates an efficient estimation method for a class of switching regressions based on the characteristic function (CF). We show that with the exponential weighting function, the CF based estimator can be achieved from minimizing a closed form distance measure. Due to the availability of the analytical structure of the asymptotic covariance, an iterative estimation procedure is developed involving the minimization of a precision measure of the asymptotic covariance matrix. Numerical examples are illustrated via a set of Monte Carlo experiments examining the implentability, finite sample property and efficiency of the proposed estimator.
Switching regression model, characteristic function; integrated squared error; Gaussian mixtures
#09-04 -- Dinghai Xu and Tony Wirjanto
This paper provides a selected review of the recent developments and applications of mixtures of normal (MN) distribution models in empirical finance. One attractive property of the MN model is that it is flexible enough to accommodate various shapes of continuous distributions, and able to capture leptokurtic, skewed and multimodal characteristics of financial time series data. In addition, the MN-based analysis fits well with the related regime-switching literature. The survey is conducted under two broad themes: (1) minimum-distance estimation methods, and (2) financial modeling and its applications.
Mixtures of normal, maximum likelihood, moment generating function, characteristic function, switching regression model, (G)ARCH model, stochastic volatility model, autoregressive conditional duration model, stochastic duration model, value at risk