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Structural Breaks and Dynamic Characteristics of Inflation and Growth Rates of Monetary Aggregates

  • Igor Pelipas

    ()

    (Belarusian Economic Research and Outreach Center (BEROC))

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    The paper addresses the problem of determining the order of integration of inflation and growth rates of monetary aggregates under the multiple structural breaks in dynamics of these variables. Discussing the existent approaches for unit root and structural breaks testing, we propose the modified one where on the first stage the structural break points are determined endogenously by impulse indicator saturation technique and then the matching break points are utilized exogenously in the appropriate Dickey-Fuller unit root test. This approach allows unit root testing for any number of structural breaks. An application of the proposed approach to Belarusian data for 1995-2009 led us to conclusion that the rates of inflation both on the basis of GDP deflator and consumer price index, as well as the growth rates of monetary aggregates M0, M1, M, and M3 are the stationary variables with a changing mean. Consequently, these variables have the order of integration I(0). The determined dates of structural breaks correspond to regime changes in the dynamics of the examined variables and have a clear economic interpretation. The results presented in the paper are useful for econometric modelling of inflation and monetary policy.

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    File URL: http://eng.beroc.by/webroot/delivery/files/WP15_eng_Pelipas.pdf
    File Function: First version, 2011
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    Paper provided by Belarusian Economic Research and Outreach Center (BEROC) in its series BEROC Working Paper Series with number 15.

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    Length: 22 pages
    Date of creation: Sep 2011
    Date of revision:
    Handle: RePEc:bel:wpaper:15
    Contact details of provider: Web page: http://www.beroc.by
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    1. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
    2. Neil R. Ericsson & James G. MacKinnon, 2000. "Distributions of Error Correction Tests for Cointegration," Econometric Society World Congress 2000 Contributed Papers 0561, Econometric Society.
    3. Zivot, Eric & Andrews, Donald W K, 1992. "Further Evidence on the Great Crash, the Oil-Price Shock, and the Unit-Root Hypothesis," Journal of Business & Economic Statistics, American Statistical Association, vol. 10(3), pages 251-70, July.
    4. Carlos Santos & David Hendry & Soren Johansen, 2008. "Automatic selection of indicators in a fully saturated regression," Computational Statistics, Springer, vol. 23(2), pages 317-335, April.
    5. Jennifer Castle & David Hendry & Jurgen A. Doornik, 2008. "Model Selection when there are Multiple Breaks," Economics Series Working Papers 407, University of Oxford, Department of Economics.
    6. Carlos Santos & Maria Alberta Oliveira, 2007. "Assessing French Inflation Persistence with Impulse Saturation Break Tests and Automatic General-to-Specific Modelling," Working Papers de Economia (Economics Working Papers) 10, Faculdade de Economia e Gestão, Universidade Católica Portuguesa (Porto).
    7. Perron, Pierre, 1990. "Testing for a Unit Root in a Time Series with a Changing Mean," Journal of Business & Economic Statistics, American Statistical Association, vol. 8(2), pages 153-62, April.
    8. Robin L. Lumsdaine & David H. Papell, 1997. "Multiple Trend Breaks And The Unit-Root Hypothesis," The Review of Economics and Statistics, MIT Press, vol. 79(2), pages 212-218, May.
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    10. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-72, June.
    11. Jushan Bai & Pierre Perron, 2003. "Computation and analysis of multiple structural change models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 18(1), pages 1-22.
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    13. Junsoo Lee & Mark C. Strazicich, 2003. "Minimum Lagrange Multiplier Unit Root Test with Two Structural Breaks," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 1082-1089, November.
    14. David Hendry & Carlos Santos, 2010. "An Automatic Test of Super Exogeneity," Economics Series Working Papers 476, University of Oxford, Department of Economics.
    15. Maria Alberta Oliveira & Carlos Santos, 2010. "Looking for a change point in French monetary policy in the early eighties," Applied Economics Letters, Taylor & Francis Journals, vol. 17(4), pages 387-392.
    16. Ericsson, Neil R & Hendry, David F & Prestwich, Kevin M, 1998. " The Demand for Broad Money in the United Kingdom, 1878-1993," Scandinavian Journal of Economics, Wiley Blackwell, vol. 100(1), pages 289-324, March.
    17. Jushan Bai & Pierre Perron, 1998. "Estimating and Testing Linear Models with Multiple Structural Changes," Econometrica, Econometric Society, vol. 66(1), pages 47-78, January.
    18. Juselius, Katarina, 2006. "The Cointegrated VAR Model: Methodology and Applications," OUP Catalogue, Oxford University Press, number 9780199285679, March.
    19. Santos, Carlos, 2008. "Impulse saturation break tests," Economics Letters, Elsevier, vol. 98(2), pages 136-143, February.
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