The persistence of inflation in OECD countries: A fractionally integrated approach

Laura Mayoral

Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra

Abstract: The statistical properties of inflation and, in particular, its degree of persistence and stability over time is a subject of intense debate and no consensus has been achieved yet. The goal of this paper is to analyze this controversy using a general approach, with the aim of providing a plausible explanation for the existing contradictory results. We consider the inflation rates of 21 OECD countries which are modelled as fractionally integrated (FI) processes. First, we show analytically that FI can appear in inflation rates after aggregating individual prices from firms that face different costs of adjusting their prices. Then, we provide robust empirical evidence supporting the FI hypothesis using both classical and Bayesian techniques. Next, we estimate impulse response functions and other scalar measures of persistence, achieving an accurate picture of this property and its variation across countries. It is shown that the application of some popular tools for measuring persistence, such as the sum of the AR coefficients, could lead to erroneous conclusions if fractional integration is present. Finally, we explore the existence of changes in inflation inertia using a novel approach. We conclude that the persistence of inflation is very high (although non-permanent) in most post-industrial countries and that it has remained basically unchanged over the last four decades.

Keywords: Inflation persistence; persistence stability; ARFIMA models; long memory; structural breaks; bayesian estimations (search for similar items in EconPapers)
JEL-codes: C22 E31 (search for similar items in EconPapers)
Date: 2005-02, Revised 2005-10
New Economics Papers: this item is included in nep-cba, nep-ets, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Related works:
Working Paper: The Persistence of Inflation in OECD Countries:a Fractionally Integrated Approach (2015)
Journal Article: The Persistence of Inflation in OECD Countries: A Fractionally Integrated Approach (2006)
Working Paper: The Persistence of Inflation in OECD Countries: A Fractionally Integrated Approach (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:upf:upfgen:958

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