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Does a Threshold Inflation Rate Exist? Quantile Inferences for Inflation and Its Variability

  • WenShwo Fang

    (Feng Chia University)

  • Stephen M. Miller

    (University of Nevada, Las Vegas, and University of Connecticut)

  • Chih-Chuan Yeh

    (The Overseas Chines Institute of Technology, Taichung)

Using quantile regressions and cross-sectional data from 152 countries, we examine the relationship between inflation and its variability. We consider two measures of inflation -- the mean and median -- and three different measures of inflation variability -- the standard deviation, relative variation, and median deviation. All results from the mean and standard deviation, the mean and relative variation, or the median and the median deviation support both the hypothesis that higher inflation creates more inflation variability and that inflation variability raises inflation across quantiles. Moreover, higher quantiles in both cases lead to larger marginal effects of inflation (inflation variability) on inflation variability (inflation). We particularly consider whether thresholds for inflation rate or inflation variability exist before finding such positive correlations. We find evidence of thresholds for inflation rates below 3 percent, but mixed results for thresholds for inflation variability. Finally, a series of robustness checks, including a set of additional explanatory variables as well as controlling for potential endogeneity with instrumental variables, leaves our findings generally unchanged.

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Paper provided by University of Connecticut, Department of Economics in its series Working papers with number 2007-45.

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Length: 52 pages
Date of creation: Dec 2007
Date of revision: Jun 2009
Publication status: Published in Empirical Economics, December 2010.
Handle: RePEc:uct:uconnp:2007-45
Note: This paper previously circulated with the title "Quantile Inferences for Inflation and Its Variability: Does a Threshold Inflation Rate Exist?"
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Web page: http://www.econ.uconn.edu/

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