Unobserved Components Models; The Local Level Model

▤ Summary

In todays blog, we explore a simple but powerful member of the unobserved components family - the local level model. Because the local level model contains an unobserved component, it fits nicely into the state-space framework. Today we will examine quarterly inflation in Australia using data from the Australian Bureau of Statistics. The local level model also produces, via the Kalman filter, an estimate of the unobserved trend component of inflation. Today weve learned more about the simple but powerful local level model.

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