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Disaggregate evidence on Spanish inflation persistence

Diego Romero-Ávila () and Carlos Usabiaga ()

Applied Economics, 2012, vol. 44, issue 23, 3029-3046

Abstract: This article investigates the degree of persistence of different inflation rates for the Spanish economy using the Consumer Price Index (CPI) for the aggregate as well as for the regions, provinces and eight groups of goods and services, in addition to the Producer Price Index (PPI) for the aggregate and 24 industrial sectors. For that purpose, we employ: (1) the unit-root tests with good size and power of Ng and Perron (2001) with the small-sample bias correction developed by Perron and Qu (2007); (2) the nonlinear Exponential Smooth Transition Autoregressive (ESTAR) unit-root test proposed by Kapetanios et al . (2003); (3) median-unbiased estimations of the persistence parameter and the respective confidence intervals through the grid-bootstrap method proposed by Hansen (1999) and (4) median-unbiased estimations of the half-life of a shock in addition to the associated confidence intervals through the method based on impulse-response functions proposed by Gospodinov (2004). The results from the application of these techniques indicate that most of the CPI-based inflation rate series clearly contain a unit root. As regards the results for the PPI-based inflation rate series, we have provided evidence that the aggregate series appears to contain a unit root, while at the industry level the inflation rate series are found to be nonlinear stationary in 13 sectors. On the basis of this robust evidence of high persistence in inflation, policymakers should pay more attention to any shock hitting inflation, since the effects are expected to be long-lasting, particularly for consumer prices. Along these lines, it is essential to implement correcting reforms with the aim of raising price adjustment flexibility if one wants to avoid having to intervene actively in the markets to reach the inflation target.

Date: 2012
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DOI: 10.1080/00036846.2011.568412

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