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Convergence of Prices and Rates of Inflation

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  • Fabio Busetti
  • Silvia Fabiani
  • Andrew Harvey

Abstract

We consider how unit-root and stationarity tests can be used to study the convergence of prices and rates of inflation. We show how the joint use of these tests in levels and first differences allows the researcher to distinguish between series that are converging and series that have already converged, and we set out a strategy to establish whether convergence occurs in relative prices or just in rates of inflation. Special attention is paid to the issue of whether a mean should be extracted in carrying out tests in first differences and whether there is an advantage to adopting a (Dickey-Fuller) unit-root test based on deviations from the last observation. The asymptotic distribution of this last test statistic is given and Monte Carlo simulation experiments show that the test yields considerable power gains for highly persistent autoregressive processes with 'relatively large' initial conditions. The tests are applied to the monthly series of the consumer price index in the Italian regional capitals over the period 1970-2003. Copyright 2006 Blackwell Publishing Ltd.

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Article provided by Department of Economics, University of Oxford in its journal Oxford Bulletin of Economics and Statistics.

Volume (Year): 68 (2006)
Issue (Month): s1 (December)
Pages: 863-877

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Handle: RePEc:bla:obuest:v:68:y:2006:i:s1:p:863-877

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Citations

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Cited by:
  1. Andrea Vaona & Guido Ascari, 2008. "Regional Inflation Persistence: Evidence from Italy," Quaderni della facoltà di Scienze economiche dell'Università di Lugano, USI Università della Svizzera italiana 0807, USI Università della Svizzera italiana.
  2. Elena Pesavento & Barbara Rossi, 2006. "Impulse Responses Confidence Intervals for Persistent Data: What Have We Learned?," Emory Economics, Department of Economics, Emory University (Atlanta) 0603, Department of Economics, Emory University (Atlanta).
  3. Huang, Ho-Chuan (River) & Liu, Wei-Han & Yeh, Chih-Chuan, 2012. "Convergence in price levels across US cities," Economics Letters, Elsevier, Elsevier, vol. 114(3), pages 245-248.
  4. Liontakis, Angelos E. & Papadas, Christos T., 2009. "Distribution Dynamics of Food Price Inflation Rates in EU: An Alternative Conditional Density Estimator Approach," 113th Seminar, September 3-6, 2009, Chania, Crete, Greece, European Association of Agricultural Economists 58084, European Association of Agricultural Economists.
  5. Angelos Liontakis & Christos T. Papadas, 2010. "Distribution Dynamics of Food Price Inflation Rates in EU: An Alternative Conditional Density Estimator Approach," Working Papers 2010-6, Agricultural University of Athens, Department Of Agricultural Economics.
  6. Winkelried, Diego & Gutierrez, José Enrique, 2012. "Regional inflation dynamics and inflation targeting in Peru," Working Papers, Banco Central de Reserva del Perú 2012-018, Banco Central de Reserva del Perú.
  7. Busetti, Fabio, 2009. "Initial conditions and stationarity tests," Economics Letters, Elsevier, Elsevier, vol. 105(3), pages 296-299, December.
  8. Ailenei, Dorel & Cristescu, Amalia, 2010. "Regional Distribution of Inflationary Pressures in Romania," Journal for Economic Forecasting, Institute for Economic Forecasting, Institute for Economic Forecasting, vol. 0(4), pages 32-43, December.
  9. Christian Dreger & Reinhold Kosfeld, 2007. "Do Regional Price Levels Converge?: Paneleconometric Evidence Based on German Districts," Discussion Papers of DIW Berlin 754, DIW Berlin, German Institute for Economic Research.
  10. Carla Massidda & Paolo Mattana, 2008. "Regional productivity and relative prices dynamics: the case of Italy," The Annals of Regional Science, Springer, Springer, vol. 42(4), pages 945-966, December.
  11. Christian Dreger & Reinhold Kosfeld, 2010. "Do Regional Price Levels Converge?," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), Justus-Liebig University Giessen, Department of Statistics and Economics, Justus-Liebig University Giessen, Department of Statistics and Economics, vol. 230(3), pages 274-286, June.
  12. repec:qut:auncer:2013_01 is not listed on IDEAS
  13. Carlos A. Carrasco & Jesus Ferreiro, 2013. "Inflation targeting in Mexico," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., M.E. Sharpe, Inc., vol. 35(3), pages 341-372, April.
  14. Yilmazkuday, Hakan, 2009. "Inflation Targeting and Inflation Convergence within Turkey," MPRA Paper 16770, University Library of Munich, Germany.
  15. Jayanta Sarkar & Hiranya K. Nath, 2013. "City Relative Price Dynamics in Australia: Are Structural Breaks Important?," Working Papers, Sam Houston State University, Department of Economics and International Business 1301, Sam Houston State University, Department of Economics and International Business.
  16. Winkelried, Diego & Gutiérrez, José, 2012. "Dinámica inflacionaria regional y el esquema de metas de inflación en el Perú," Revista Estudios Económicos, Banco Central de Reserva del Perú, Banco Central de Reserva del Perú, issue 24, pages 79-98.

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