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Long Memory in Import and Export Price Inflation and Persistence of Shocks to the Terms of Trade

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Author Info
G. K. Randolph TAN
Abstract

Long memory models have been successfully used to investigate the dynamic time-series behavior of inflation rates based on the CPI and WPI. However, almost no attention has been paid to import and export price inflation, nor to the terms of trade which they make up. This article investigates the dynamics of the terms of trade by focusing first on the time-series characteristics of these price series. It tests for long memory in export and import price inflation series and estimates the fractional differencing parameter using a number of approaches. To give a better idea of the degree of persistence of each series, estimates of the impulse responses are computed which take into account possible fractional integration. The dynamic behavior in changes in the terms of trade is then related to the long memory behavior of the import and export price inflation series. In a sample of eleven economies for which data is available, evidence of long memory in import and export price inflation occurs in about half the cases. Granger (1980) points out that the natural occurrence of long memory may be attributed to aggregation in macroeconomic series. Our analysis provides evidence of an alternative explanation, namely that long-memory may result from the differencing of a linear relationship between non-cointegrating variables. Specifically, the results from our analysis of eleven economies reveal that shocks to the terms of trade will persist if the constituent price inflation series are not cointegrated

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Paper provided by Econometric Society in its series Econometric Society 2004 Far Eastern Meetings with number 732.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:feam04:732

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Related research
Keywords: long memory; terms of trade; imported inflation;

Find related papers by JEL classification:
C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
F18 - International Economics - - Trade - - - Trade and Environment

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  2. Osterwald-Lenum, Michael, 1992. "A Note with Quantiles of the Asymptotic Distribution of the Maximum Likelihood Cointegration Rank Test Statistics," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 54(3), pages 461-72, August.
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  5. Philip Hans Franses & Marius Ooms & Charles S. Bos, 1999. "Long memory and level shifts: Re-analyzing inflation rates," Empirical Economics, Springer, vol. 24(3), pages 427-449. [Downloadable!] (restricted)
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  6. Elliott, Graham & Rothenberg, Thomas J & Stock, James H, 1996. "Efficient Tests for an Autoregressive Unit Root," Econometrica, Econometric Society, vol. 64(4), pages 813-36, July. [Downloadable!] (restricted)
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  7. Hassler, Uwe & Wolters, Jurgen, 1995. "Long Memory in Inflation Rates: International Evidence," Journal of Business & Economic Statistics, American Statistical Association, vol. 13(1), pages 37-45, January.
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  13. Kwiatkowski, Denis & Phillips, Peter C. B. & Schmidt, Peter & Shin, Yongcheol, 1992. "Testing the null hypothesis of stationarity against the alternative of a unit root : How sure are we that economic time series have a unit root?," Journal of Econometrics, Elsevier, vol. 54(1-3), pages 159-178. [Downloadable!] (restricted)
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  14. Baillie, Richard T., 1996. "Long memory processes and fractional integration in econometrics," Journal of Econometrics, Elsevier, vol. 73(1), pages 5-59, July. [Downloadable!] (restricted)
  15. Serena Ng & Pierre Perron, 2001. "LAG Length Selection and the Construction of Unit Root Tests with Good Size and Power," Econometrica, Econometric Society, vol. 69(6), pages 1519-1554, November. [Downloadable!] (restricted)
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  18. Lee, Dongin & Schmidt, Peter, 1996. "On the power of the KPSS test of stationarity against fractionally-integrated alternatives," Journal of Econometrics, Elsevier, vol. 73(1), pages 285-302, July. [Downloadable!] (restricted)
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