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Inflation and breaks: the validity of the Dickey-Fuller test

Manuel Gómez-Zaldívar and Daniel Ventosa-Santaulària ()

No EM200601, Department of Economics and Finance Working Papers from Universidad de Guanajuato, Department of Economics and Finance

Abstract: This article proves the asymptotic efficiency of the Dickey Fuller (DF) test when the Data Generating Process of the variable under consideration is in fact mean stationary with breaks. Monte Carlo simulations show that asymptotic properties remain valid for sample sizes of practical interest. We illustrate its performance by studying inflation rate series, a variable that should be stationary if the monetary authority follows an effective inflation targeting regime: shocks are short-lived, therefore, inflation fluctuates randomly around pre-specified targets.

Keywords: Dickey-Fuller test; Mean Stationary Process; Structural Breaks (search for similar items in EconPapers)
JEL-codes: C12 C22 E31 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ecm and nep-mac
Date: 2007-06
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