Unit Roots in Inflation and Aggregation Bias

Joseph Byrne, Alexandros Kontonikas () and Alberto Montagnoli ()

Working Papers from Business School - Economics, University of Glasgow

Abstract: In this paper, we examine whether UK inflation is characterized by aggregation bias using three sets of increasingly disaggregated inflation data and a battery of univariate and panel unit root tests. Our results support the existence of aggregation bias since while the unit root hypothesis cannot be rejected for aggregate inflation, it can be rejected for some of its sectoral components, with the rejection frequencies increasing when we use more disaggregate data. Results from structural break analysis indicate that monetary policy shifts are the main factor behind breaks in UK inflation. The panel results typically indicate that when sectoral inflation rates are pooled the unit root hypothesis can be rejected. Our results have important implications for applied econometric analysis, macroeconomic theory and for the conduct of monetary policy.

Keywords: Inflation; Unit Root; Disaggregation; Structural Breaks; Panel Data (search for similar items in EconPapers)
JEL-codes: C22 C23 E31 (search for similar items in EconPapers)
Date: 2007-05
New Economics Papers: this item is included in nep-cba, nep-ecm, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:gla:glaewp:2007_07

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