Modeling U.S. Inflation Dynamics: A Bayesian Nonparametric Approach

Abstract

This paper uses an infinite hidden Markov model (IHMM) to analyze U.S. inflation dynamics with a particular focus on the persistence of inflation. The IHMM is a Bayesian nonparametric approach to modeling structural breaks. It allows for an unknown number of breakpoints and is a flexible and attractive alternative to existing methods. We found a clear structural break during the recent financial crisis. Prior to that, inflation persistence was high and fairly constant.inflation dynamics, hierarchical Dirichlet process, IHMM, structural breaks, Bayesian nonparametrics