Spatiotemporal analysis of inflation in euro zone countries

Abstract

This paper applies the spatiotemporal technology to modeling inflation rates of eight euro zone countries in a time interval from 1998 to 2008. While applying Gaussian copula to increase the flexibility of the multivariate model, I use the weighted pairwise composite likelihood method suggested by Lindsay (1988), Cox and Reid (2004) to tackle the computational problem. Due to the existence of exogenous shock, the fitted series show noises and vibrate around the real series. These noises can be eliminated by a three-term moving average smoother, indicating that the model can explain the majority of the spatiotemporal dependence of inflation rates in these countries.