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Convergences of prices and rates of inflation

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  • Fabio Busetti

    ()
    (Bank of Italy)

  • Silvia Fabiani

    ()
    (Bank of Italy)

  • Andrew Harvey

    ()
    (Cambridge University)

Abstract

We consider how unit root and stationarity tests can be used to study the convergence properties of prices and rates of inflation. Special attention is paid to the issue of whether a mean should be extracted in carrying out unit root and stationarity tests and whether there is an advantage to adopting a new (Dickey-Fuller) unit root test based on deviations from the last observation. The asymptotic distribution of the new 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 case of primary interest for analysing convergence. We argue that the joint use of unit root and stationarity 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. The tests are applied to the monthly series of the Consumer Price Index in the Italian regional capitals over the period 1970-2003. It is found that all pairwise contrasts of inflation rates have converged or are in the process of converging. Only 24% of price level contrasts appear to be converging, but a multivariate test provides strong evidence of overall convergence.

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Bibliographic Info

Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 575.

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Date of creation: Feb 2006
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Handle: RePEc:bdi:wptemi:td_575_06

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Keywords: Dickey-Fuller test; initial condition; law of one price; stationarity test;

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Citations

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Cited by:
  1. Yilmazkuday, Hakan, 2009. "Inflation Targeting and Inflation Convergence within Turkey," MPRA Paper 16770, University Library of Munich, Germany.
  2. Andrea Vaona & Guido Ascari, 2008. "Regional Inflation Persistence: Evidence from Italy," Quaderni della facoltà di Scienze economiche dell'Università di Lugano 0807, USI Università della Svizzera italiana.
  3. 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.
  4. Winkelried, Diego & Gutierrez, José Enrique, 2012. "Regional inflation dynamics and inflation targeting in Peru," Working Papers 2012-018, Banco Central de Reserva del Perú.
  5. 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.
  6. Elena Pesavento & Barbara Rossi, 2006. "Impulse Responses Confidence Intervals for Persistent Data: What Have We Learned?," Emory Economics 0603, Department of Economics, Emory University (Atlanta).
  7. Jayanta Sarkar & Hiranya K. Nath, 2013. "City Relative Price Dynamics in Australia: Are Structural Breaks Important?," Working Papers 1301, Sam Houston State University, Department of Economics and International Business.
  8. repec:qut:auncer:2013_01 is not listed on IDEAS
  9. Busetti, Fabio, 2009. "Initial conditions and stationarity tests," Economics Letters, Elsevier, vol. 105(3), pages 296-299, December.
  10. Ailenei, Dorel & Cristescu, Amalia, 2010. "Regional Distribution of Inflationary Pressures in Romania," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(4), pages 32-43, December.
  11. Carla Massidda & Paolo Mattana, 2008. "Regional productivity and relative prices dynamics: the case of Italy," The Annals of Regional Science, Springer, vol. 42(4), pages 945-966, December.
  12. Carlos A. Carrasco & Jesus Ferreiro, 2013. "Inflation targeting in Mexico," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 35(3), pages 341-372, April.
  13. 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, vol. 230(3), pages 274-286, June.
  14. 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, issue 24, pages 79-98.
  15. Huang, Ho-Chuan (River) & Liu, Wei-Han & Yeh, Chih-Chuan, 2012. "Convergence in price levels across US cities," Economics Letters, Elsevier, vol. 114(3), pages 245-248.
  16. 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 58084, European Association of Agricultural Economists.

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