Inflation Dynamics and Persistence: Implications for Monetary Policy

We study inflation persistence in Argentina between 1980 and 2007 using two approaches: time-series analysis and frequency-domain analysis. Employing recursive methods and the structural-break tests developed by Bai and Perron, we identify breaks in the mean inflation rate that coincide with changes in the monetary regime: the adoption of the Convertibility regime in 1991 and its abandonment in January 2002. We find that inflation was highly persistent during the high-inflation period. As inflation declined following the introduction of the Convertibility regime, its persistence decreased markedly. After the adoption of a managed floating exchange-rate regime—and controlling for the inflationary episode triggered by the peso’s devaluation in 2002—inflation once again displayed more persistent behavior. Frequency-domain analysis reveals that the total variability of the inflation rate increased after the 2002 devaluation and that the contribution of the high-frequency component, associated with trend movements in prices, became more significant following this regime change, possibly because of a slow adjustment in relative prices after the devaluation. These findings confirm that, in Argentina, persistence is not an intrinsic characteristic of inflation but rather depends on the prevailing monetary regime.