Which is the Best Model for the US Inflation Rate: A Structural Change Model or a Long Memory Process?

: This paper analyzes the dynamics of the US inflation time series using two classes of models: structural change models and long memory processes. For the first class, the Markov Switching Autoregressive (MS-AR) model of Hamilton (1989) and the Structural Change-Autoregressive (SCH-AR) model developed by Bai and Perron (1998 and 2003) are used. For the second class, the Autoregressive Fractionally Integrated Moving Average (ARFIMA) process developed by Granger and Joyeux (1980) is used. Moreover, the nature (true or spurious) of the observed long memory behavior is also investigated. The empirical results provide evidence for changes in mean. Break dates coincide with some economic and financial events, such as the Vietnam War and the two oil price shocks. Moreover, the results reveal that the observed long memory behavior is spurious and is due to the presence of breaks in the data.