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Time Series Approach to Test a Change in Inflation Persistence: The Mexican Experience

  • Manuel Ramos Francia
  • Daniel Chiquiar
  • Antonio E. Noriega

When monetary policy has an explicit inflation target, observed inflation should be a stationary process. In countries where, for a variety of reasons, the determinants of inflation could lead it to follow a non-stationary process, the adoption of an inflation targeting framework should therefore induce a fundamental change in the stochastic process governing inflation. This paper studies the time series properties of Mexican inflation during 1995-2006, using recently developed techniques to detect a change in the persistence of economic time series. Consistent with the adoption of an inflation-targeting framework, the results suggest that inflation in Mexico seems to have switched from a nonstationary to a stationary process around the end of year 2000 or the beginning of 2001.

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Paper provided by Banco de México in its series Working Papers with number 2007-01.

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Date of creation: Jan 2007
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Handle: RePEc:bdm:wpaper:2007-01
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  9. Andrews, Donald W K & Ploberger, Werner, 1994. "Optimal Tests When a Nuisance Parameter Is Present Only under the Alternative," Econometrica, Econometric Society, vol. 62(6), pages 1383-1414, November.
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  13. Luca Benati, 2008. "Investigating Inflation Persistence Across Monetary Regimes," The Quarterly Journal of Economics, Oxford University Press, vol. 123(3), pages 1005-1060.
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  15. Kim, Jae-Young, 2000. "Detection of change in persistence of a linear time series," Journal of Econometrics, Elsevier, vol. 95(1), pages 97-116, March.
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  17. Carlos Capistrán & Manuel Ramos Francia, 2006. "Inflation Dynamics in Latin America," Working Papers 2006-11, Banco de México.
  18. Claudio Borio & William English & Andrew Filardo, 2003. "A tale of two perspectives: old or new challenges for monetary policy?," BIS Papers chapters, in: Bank for International Settlements (ed.), Monetary policy in a changing environment, volume 19, pages 1-59 Bank for International Settlements.
  19. Musy, Olivier, 2006. "Inflation persistence and the real costs of disinflation in staggered prices and partial adjustment models," Economics Letters, Elsevier, vol. 91(1), pages 50-55, April.
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