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Nonlinear Inflationary Persistence and Growth: Theory and Empirical Comparative Analysis

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  • Charemza, Wojciech

    ()
    (University of Leicester, UK)

  • Makarova, Svetlana

    (University College London, UK)

Abstract

The paper focuses on the decomposition of inflation persistence into the linear and nonlinear components. The hypothesis is that the nonlinear component of inflation persistence results from a technological shock and might positively contribute to economic growth. The microfoundations are derived from an assumption of Calvo pricing and sticky-information Keynesian Phillips curve. The hypothesis is evaluated empirically with the use of monthly data series for inflation for 119 countries. Linear and nonlinear (bilinear) inflation persistence measures have been estimated with the use of a bilinear autoregressive moving average model in a state space form. Further on, correlation analysis has been performed for these countries to detect a relationship between economic growth and linear and nonlinear persistence. The paper concludes that the nonlinear inflation persistence contributes positively to economic growth after 2000.

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Bibliographic Info

Article provided by Institute for Economic Forecasting in its journal Romanian Journal for Economic Forecasting.

Volume (Year): 6 (2009)
Issue (Month): 2 (June)
Pages: 5-22

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Handle: RePEc:rjr:romjef:v:6:y:2009:i:2:p:5-22

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Related research

Keywords: inflation; growth; bilinear processes;

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References

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  1. Peel, David & Davidson, James, 1998. "A non-linear error correction mechanism based on the bilinear model1," Economics Letters, Elsevier, vol. 58(2), pages 165-170, February.
  2. Halunga, Andreea G. & Osborn, Denise R. & Sensier, Marianne, 2009. "Changes in the order of integration of US and UK inflation," Economics Letters, Elsevier, vol. 102(1), pages 30-32, January.
  3. Robert J. Barro, 1995. "Inflation and Economic Growth," NBER Working Papers 5326, National Bureau of Economic Research, Inc.
  4. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  5. Richard Mash, 2006. "Optimising Microfoundations for Inflation Persistence," Computing in Economics and Finance 2006 457, Society for Computational Economics.
  6. Max Gillman & Mark Harris & László Mátyás, 2002. "Inflation and Growth: Some Theory and Evidence," 10th International Conference on Panel Data, Berlin, July 5-6, 2002 D5-1, International Conferences on Panel Data.
  7. Marvin Goodfriend & Robert G. King, 1998. "The new neoclassical synthesis and the role of monetary policy," Working Paper 98-05, Federal Reserve Bank of Richmond.
  8. Beechey, Meredith & Österholm, Pär, 2009. "Time-varying inflation persistence in the Euro area," Economic Modelling, Elsevier, vol. 26(2), pages 532-535, March.
  9. Dias, Daniel & Robalo Marques, Carlos, 2005. "Using mean reversion as a measure of persistence," Working Paper Series 0450, European Central Bank.
  10. Pivetta, Frederic & Reis, Ricardo, 2007. "The persistence of inflation in the United States," Journal of Economic Dynamics and Control, Elsevier, vol. 31(4), pages 1326-1358, April.
  11. Wojciech Charemza & Daniela Hristova & Peter Burridge, 2005. "Is inflation stationary?," Applied Economics, Taylor & Francis Journals, vol. 37(8), pages 901-903.
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Cited by:
  1. Andrew Phiri, 2012. "Threshold effects and inflation persistence in South Africa," Journal of Financial Economic Policy, Emerald Group Publishing, vol. 4(3), pages 247-269, August.

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