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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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  • G. K. Randolph TAN
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    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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    Keywords: long memory; terms of trade; imported inflation;

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    2. Franses, Philip Hans & Ooms, Marius, 1997. "A periodic long-memory model for quarterly UK inflation," International Journal of Forecasting, Elsevier, vol. 13(1), pages 117-126, March.
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    7. Denis Kwiatkowski & Peter C.B. Phillips & Peter Schmidt, 1991. "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?," Cowles Foundation Discussion Papers 979, Cowles Foundation for Research in Economics, Yale University.
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    10. Cashin, Paul & McDermott, C. John & Pattillo, Catherine, 2004. "Terms of trade shocks in Africa: are they short-lived or long-lived?," Journal of Development Economics, Elsevier, vol. 73(2), pages 727-744, April.
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    12. Charles S. Bos & Philip Hans Franses & Marius Ooms, 1998. "Long Memory and Level Shifts: Re-Analyzing Inflation Rates," Tinbergen Institute Discussion Papers 98-039/4, Tinbergen Institute.
    13. Anna Persson & Timo Teräsvirta, 2003. "The net barter terms of trade: A smooth transition approach," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 8(1), pages 81-97.
    14. 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.
    15. Andrews, Donald W K, 1993. "Exactly Median-Unbiased Estimation of First Order Autoregressive/Unit Root Models," Econometrica, Econometric Society, vol. 61(1), pages 139-65, January.
    16. Nelson, Charles R & Schwert, G William, 1977. "Short-Term Interest Rates as Predictors of Inflation: On Testing the Hypothesis That the Real Rate of Interest is Constant," American Economic Review, American Economic Association, vol. 67(3), pages 478-86, June.
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    18. Benoit Mandelbrot, 1963. "The Variation of Certain Speculative Prices," The Journal of Business, University of Chicago Press, vol. 36, pages 394.
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