RDP 2012-01: Co-movement in Inflation Appendix B: Feasible Least Squares Estimation

As discussed in Appendix A, for σ² > 0 the error term in the restricted SUR form of the model is heteroskedastic, with variance given by σ_tΩ where . In the version of the model where σ² was estimated, the posterior mean estimate of σ² was found to be small but away from zero, which suggests there is some evidence of (minor) heteroskedasticity in the errors. Therefore as a robustness check we also estimated the restricted SUR form of the model using feasible least squares and calculated robust standard errors. Table B1 presents t-statistics for some of the key coefficients in the model. While there are some differences compared with the Bayesian estimates, qualitatively the results are similar. In particular, the common inflation indicator was still found to be significant in both the headline and core inflation versions of the model and oil price inflation was found to be a significant explanator of headline inflation.