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Nonlinearity and stationarity of inflation rates: Evidence from the euro-zone countries

  • Su Zhou

    (The University of Texas at San Antonio)

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    Few studies have empirically examined the possibility of nonlinearity in inflation and tested nonlinear stationarity of the inflation rates. The present study thus intends to fill the gap. The study examines the hypothesis that, for a group of countries having exercised target-zone type stabilization policies with their inflation eventually converging to similar low levels, their inflation rates would have stationary behavior. When the sample includes periods where inflation control is an alternative objective to other objectives of policymakers and central banks respond to inflation actively only when inflation deviations from the target range become large, non-linearity may exist in inflation. The hypothesis is tested for a sample over the floating exchange rate period for 12 European countries that formed the euro zone later in the sample period. The results suggest that the majority of these countries’ inflation rates can be characterized by mean reversion during the sample period. Many of them appear to be nonlinearly stationary. This finding is essential in conducting applied economic studies for these countries, when constructing models whose validity relies on whether or not inflation is stationary.

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    File URL: http://business.utsa.edu/wps/eco/0006ECO-106-2010.pdf
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    Paper provided by College of Business, University of Texas at San Antonio in its series Working Papers with number 0006.

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    Length: 18 pages
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    Handle: RePEc:tsa:wpaper:0106
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    1. Richard Clarida & Jordi Gali & Mark Gertler, 1997. "Monetary Policy Rules in Practice: Some International Evidence," NBER Working Papers 6254, National Bureau of Economic Research, Inc.
    2. Rafael Domenech & Mayte Ledo & David Taguas, 2000. "Some new results on interest rate rules in EMU and in the US," Working Papers 0002, BBVA Bank, Economic Research Department.
    3. Janet L. Yellen & George A. Akerlof, 2006. "Stabilization Policy: A Reconsideration," Economic Inquiry, Western Economic Association International, vol. 44(1), pages 1-22, January.
    4. Culver, Sarah E & Papell, David H, 1997. "Is There a Unit Root in the Inflation Rate? Evidence from Sequential Break and Panel Data Models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 12(4), pages 435-44, July-Aug..
    5. 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.
    6. Granger, Clive W. J. & Terasvirta, Timo, 1993. "Modelling Non-Linear Economic Relationships," OUP Catalogue, Oxford University Press, number 9780198773207.
    7. Lambertini, Luisa & Miller, Marcus & Sutherland, Alan, 1991. "Inflation Convergence with Realignments in a Two-Speed Europe," CEPR Discussion Papers 597, C.E.P.R. Discussion Papers.
    8. Michael J. Artis & Mark P. Taylor, 1994. "The Stabilizing Effect of the ERM on Exchange Rates and Interest Rates: Some Nonparametric Tests," IMF Staff Papers, Palgrave Macmillan, vol. 41(1), pages 123-148, March.
    9. Martin D.D. Evans & Karen K. Lewis, 1993. "Do Expected Shifts in Inflation Affect Estimates of the Long-Run Fisher Relation?," Working Papers 93-06, New York University, Leonard N. Stern School of Business, Department of Economics.
    10. Orphanides, Athanasios & Wieland, Volker, 1999. "Inflation zone targeting," Working Paper Series 0008, European Central Bank.
    11. Westbrook, Jilleen R, 1998. "Monetary Integration, Inflation Convergence and Output Shocks in the European Monetary System," Economic Inquiry, Western Economic Association International, vol. 36(1), pages 138-44, January.
    12. Wojciech Charemza & Daniela Hristova & Peter Burridge, 2005. "Is inflation stationary?," Applied Economics, Taylor & Francis Journals, vol. 37(8), pages 901-903.
    13. Kapetanios, George & Shin, Yongcheol & Snell, Andy, 2003. "Testing for a unit root in the nonlinear STAR framework," Journal of Econometrics, Elsevier, vol. 112(2), pages 359-379, February.
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