Inflation Dynamics and Persistence: Implications for Monetary Policy

Laura D'Amato (), Maria Garegnani () and Juan M. Sotes
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Juan M. Sotes: Central Bank of Argentina

Ensayos Económicos, 2008, vol. 1, issue 50, 127-167

Abstract: We study inflation persistence in Argentina between 1980 and 2007 using two approaches: time-series analysis and frequency-domain analysis. Employing recursive methods and the structural-break tests developed by Bai and Perron, we identify breaks in the mean inflation rate that coincide with changes in the monetary regime: the adoption of the Convertibility regime in 1991 and its abandonment in January 2002. We find that inflation was highly persistent during the high-inflation period. As inflation declined following the introduction of the Convertibility regime, its persistence decreased markedly. After the adoption of a managed floating exchange-rate regime—and controlling for the inflationary episode triggered by the peso’s devaluation in 2002—inflation once again displayed more persistent behavior. Frequency-domain analysis reveals that the total variability of the inflation rate increased after the 2002 devaluation and that the contribution of the high-frequency component, associated with trend movements in prices, became more significant following this regime change, possibly because of a slow adjustment in relative prices after the devaluation. These findings confirm that, in Argentina, persistence is not an intrinsic characteristic of inflation but rather depends on the prevailing monetary regime.

Keywords: Argentina; frequency domain analysis; inflation persistence; mean inflation; time series (search for similar items in EconPapers)
JEL-codes: C22 E31 E52 (search for similar items in EconPapers)
Date: 2008
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