Persistence, mean reversion, and non-linearities in inflation rates in the GCC countries: an eclectic approach

The inflation rate is a key variable in many macroeconomic models that are used to guide policy analysts and lead to effective decisions. However, achieving this outcome depends, to a large extent, upon the validity of these macroeconomic models whose successes, in turn, critically depend on whether inflation is stationary or not. In this paper, we investigate the dynamics of inflation in the Gulf Cooperation Council countries using both linear and non-linear tests. To add an extra layer of robustness to our results, we avoid the pitfalls of the econometrics of stationarity by applying the MS-ADF and Fourier ADF tests. After using a battery of tests, the analysis provides more reliable inferences on the question of whether the inflation rates of these countries are I(0) or I(1). The findings convincingly support the view that not only are the inflation rates of these countries non-linear, but they are also characterized by mean-reversion behaviour. The policy implication of our findings is that random shocks will not have permanent effects and that active monetary policies are not needed, as these effects will eventually disappear in the long run.