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Trend stationary of inflation rates: evidence from LM unit root testing with a long span of historical data

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  • Chien-Chiang Lee
  • Chun-Ping Chang

Abstract

The article applies the LM univariate unit root test recently developed by Lee and Strazicich (2003, 2004) to re-examine the validity of trend stationary in the inflation rates of 11 OECD and Asian countries using a longer span of historical data. Our empirical findings are favourable to the trend stationary of the inflation rates when we control the structural breaks in series, and therefore they point to the absence of hyperinflation in the majority of the countries. The results indicate that shocks to inflation rates are temporary and soon converge, with the inflation rates being trend stationary. Hence, most structural breaks in the inflation rate occur around the Great Depression, World War I, World War II, and energy shock periods. For the convergence effect, we repeat the unit root tests utilized above for smaller sub-samples so as to provide a robust analysis. The outcomes show that by selecting a longer data span, we can catch more powerful convergent evidence. Overall, some policy implications are obtained in this article.

Suggested Citation

  • Chien-Chiang Lee & Chun-Ping Chang, 2008. "Trend stationary of inflation rates: evidence from LM unit root testing with a long span of historical data," Applied Economics, Taylor & Francis Journals, vol. 40(19), pages 2523-2536.
    • Handle: RePEc:taf:applec:v:40:y:2008:i:19:p:2523-2536
    DOI: 10.1080/00036840600970138
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    References listed on IDEAS

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    1. Andrew T. Levin & Jeremy M. Piger, 2003. "Is inflation persistence intrinsic in industrial economies?," Working Papers 2002-023, Federal Reserve Bank of St. Louis.
    2. Junsoo Lee & Mark C. Strazicich, 2013. "Minimum LM unit root test with one structural break," Economics Bulletin, AccessEcon, vol. 33(4), pages 2483-2492.
    3. Ajit Dayanandan & Mukesh Ralhan, 2005. "Price Index Convergence Among Provinces and Cities of Canada: 1978 - 2001," Econometrics Working Papers 0504, Department of Economics, University of Victoria.
    4. Mr. J. H. Green, 1996. "Inflation Targeting: Theory and Policy Implications," IMF Working Papers 1996/065, International Monetary Fund.
    5. Corvoisier, Sandrine & Mojon, Benoît, 2005. "Breaks in the mean of inflation: how they happen and what to do with them," Working Paper Series 451, European Central Bank.
    6. John H. Green, 1996. "Inflation Targeting: Theory and Policy Implications," IMF Staff Papers, Palgrave Macmillan, vol. 43(4), pages 779-795, December.
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    Cited by:

    1. Valera, Harold Glenn A. & Holmes, Mark J. & Hassan, Gazi M., 2017. "How credible is inflation targeting in Asia? A quantile unit root perspective," Economic Modelling, Elsevier, vol. 60(C), pages 194-210.
    2. Gallo, Andres & Mason, Paul & Shapiro, Steve & Fabritius, Michael, 2010. "What is behind the increase in oil prices? Analyzing oil consumption and supply relationship with oil price," Energy, Elsevier, vol. 35(10), pages 4126-4141.
    3. Georgios P. Kouretas & Mark E. Wohar, 2012. "The dynamics of inflation: a study of a large number of countries," Applied Economics, Taylor & Francis Journals, vol. 44(16), pages 2001-2026, June.
    4. Kamel Malik BENSAFTA & Gervasio SEMEDO, 2015. "Les structures économiques des pays du Maghreb : convergence ou divergence vis-à-vis de l'Europe ? (annule et remplace le DR LEO 2013-05)," LEO Working Papers / DR LEO 2092, Orleans Economics Laboratory / Laboratoire d'Economie d'Orleans (LEO), University of Orleans.
    5. Liu, Tie-Ying & Lee, Chien-Chiang, 2021. "Global convergence of inflation rates," The North American Journal of Economics and Finance, Elsevier, vol. 58(C).
    6. Narayan, Paresh Kumar & Popp, Stephan, 2011. "An application of a new seasonal unit root test to inflation," International Review of Economics & Finance, Elsevier, vol. 20(4), pages 707-716, October.
    7. Jesús Clemente & María Dolores Gadea & Antonio Montañés & Marcelo Reyes, 2017. "Structural Breaks, Inflation and Interest Rates: Evidence from the G7 Countries," Econometrics, MDPI, vol. 5(1), pages 1-17, February.
    8. Kamel Malik Bensafta & Gervasio Semedo, 2014. "Les structures économiques des pays du Maghreb : convergence ou divergence vis-à-vis de l'Europe ?," Working Papers halshs-01012035, HAL.
    9. Kamel Malik BENSAFTA & Gervasio SEMEDO, 2013. "Les structures économiques de pays du Maghreb : convergence ou divergence vis-à-vis de l'Europe ? (annulé et remplacé par le DR LEO 2015-11)," LEO Working Papers / DR LEO 1148, Orleans Economics Laboratory / Laboratoire d'Economie d'Orleans (LEO), University of Orleans.

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