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Does a Threshold Inflation Rate Exist? Quantile Inferences for Inflation and Its Variability

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  • WenShwo Fang

    ()
    (Department of Economics, Feng Chia University)

  • Stephen M. Miller

    ()
    (Department of Economics, University of Nevada, Las Vegas)

  • Chih-Chuan Yeh

    ()
    (Department of Finance, The Overseas Chinese Institute of Technology)

Abstract

Using quantile regressions and cross-sectional data from 152 countries, we examine the relationship between inflation and its variability. We consider two measures of inflation – the mean and median – and three different measures of inflation variability – the standard deviation, relative variation, and median deviation. All results from the mean and standard deviation, the mean and relative variation, or the median and the median deviation support both the hypothesis that higher inflation creates more inflation variability and that inflation variability raises inflation across quantiles. Moreover, higher quantiles in both cases lead to larger marginal effects of inflation (inflation variability) on inflation variability (inflation). We particularly consider whether thresholds for inflation rate or inflation variability exist before finding such positive correlations. We find evidence of thresholds for the effect of inflation (inflation variability) on inflation variability (inflation). That is, for low inflation (inflation variability) countries, inflation (inflation variability) does not affect inflation variability (inflation). Finally, a series of robustness checks, including a set of additional explanatory variables as well as controlling for potential endogeneity with instrumental variables, leaves our findings generally unchanged.

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File URL: http://web.unlv.edu/projects/RePEc/pdf/0921.pdf
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Bibliographic Info

Paper provided by University of Nevada, Las Vegas , Department of Economics in its series Working Papers with number 0921.

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Length: 63 pages
Date of creation: Jun 2009
Date of revision: Dec 2009
Handle: RePEc:nlv:wpaper:0921

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Keywords: inflation; inflation variability; inflation targeting; threshold effects; quantile regression;

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