Stochastic volatility models with ARMA innovations: An application to G7 inflation forecasts

Elsevier BV
Publication Type:
Journal Article
International Journal of Forecasting, 2020
Issue Date:
Full metadata record
© 2020 International Institute of Forecasters We introduce a new class of stochastic volatility models with autoregressive moving average (ARMA) innovations. The conditional mean process has a flexible form that can accommodate both a state space representation and a conventional dynamic regression. The ARMA component introduces serial dependence, which results in standard Kalman filter techniques not being directly applicable. To overcome this hurdle, we develop an efficient posterior simulator that builds on recently developed precision-based algorithms. We assess the usefulness of these new models in an inflation forecasting exercise across all G7 economies. We find that the new models generally provide competitive point and density forecasts compared to standard benchmarks, and are especially useful for Canada, France, Italy, and the U.S.
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