SEARCH WITHIN CONTENT
Citation Information : Statistics in Transition New Series. Volume 19, Issue 3, Pages 477-493, DOI: https://doi.org/10.21307/stattrans-2018-026
License : (BY-NC-ND 4.0)
Published Online: 13-December-2018
The need to understand the stationarity property of inflation of any country is paramount in the design of monetary targeting policy. In this paper, unit root hypotheses of inflation rates in 21 OECD countries are investigated using the newly proposed GARCH-based unit root tests with structural break and trend specifications. The results show that classical tests over-accept unit roots in inflation rates, whereas these tests are not robust to heteroscedasticity. As it is observed from the pre-tests, those tests with structural break reject more null hypotheses of unit roots of most inflation series than those without structural breaks. By applying variants of GARCH-based unit root tests, which include those with structural breaks and time trend regression specifications, we find that unit root tests without time trend give most rejections of the conventional unit roots. Thus, care should be taken while applying variants of the new unit root tests on weak trending time series as indicated in this work. Batteries of unit root tests for discriminating between stationarity and nonstationarity of inflation rates are recommended, since in the case of over-differenced series, wrong policy decision will be made, particularly when inflation series is considered in a cointegrating relationship with other variables.
BAI, J., PERRON, P., (2003). Computation and Analysis of Multiple Structural Change Models. Journal of Applied Econometrics, 18, pp. 1–22.
BASHER, S. A., WESTERLUND, J., (2008). Is there really a unit root in the inflation rate? More evidence from panel data models. Applied Economics Letters, 15 (3), pp. 161–164.
BOLLERSLEV, T., (1986). Generalized Autoregressive Conditional Heteroskedasticity. Journal of Econometrics, 31, pp. 307–327.
CANARELLA, G., MILLER, S., (2017). Inflation targeting and inflation persistence. New evidence from fractional integration and cointegration. Journal of Economics and Business, 92, pp. 45–62.
CECCHETTI, S., DEBELLE, G., (2006). Has the inflation process changed? Economic Policy, 21 (46), pp. 311–352.
CHANG, T., RANJBAR, O., TANG, D. P., (2013). Revisiting the mean reversion of inflation rates for 22 OECD countries. Economic Modelling, 30, pp. 245–252.
COOK, S., (2008). Joint maximum likelihood estimation of unit root testing equations and GARCH processes: some finite-sample issues. Mathematics and Computers in Simulation, 77, pp. 109–116.
CULVER, S. E., PAPELL, D. H., (1997). Is there a unit root in the inflation rate? Evidence from sequential break and panel data model models. Journal of Applied Econometrics, 12, pp. 435–444.
DICKEY, D. A., FULLER, W. A., (1979). Distribution of the Estimators for Autoregressive Time Series with a Unit Root. Journal of the American Statistical Association 74, pp. 427–431.
DICKEY, D. A., FULLER, W. A., (1981). Distribution of the estimators for autoregressive time series with a unit root. Econometrica 49, pp. 1057–1072.
ELLIOT, G., ROTHENBERG, T. J., STOCK, J. H., (1996). Efficient tests for an Autoregressive unit root. Econometrica, 64, pp. 813–836.
FULLER, W. A., (1976). Introduction to statistical Time Series. Wiley, New York.
GIL-ALANA, L. A., SHITTU, O. I., YAYA, O. S., (2012). Long memory, Structural breaks and Mean shifts in the Inflation rates in Nigeria. African Journal of Business Management, 6 (3), pp. 888–897.
GIL-ALANA, L. A., YAYA, O. S., SOLADEMI, E. A., (2016). Testing unit roots, structural breaks and linearity in the inflation rates in the G7 countries with fractional dependence techniques. Applied Stochastic Models in Business and Industry, 32, pp. 711–724.
GREGORIOU, A., KONTONIKAS, A., (2009). Modelling the behaviour of inflation deviations from the target. Economic Modelling, 26, pp. 90–95.
HALDRUP, N., (1994). Heteroscedasticity in non-stationary time series, some Monte Carlo evidence. Statistical Papers, 35, pp. 287–307.
HUANG, H.-C., LIN, P.-C., YEH, C.-C., (2010). Price level convergence across cities? Evidence from panel unit root tests. Applied Economics Letters, 18 (1), pp. 87–93.
KIM, K., SCHMIDT, P., (1993). Unit root tests with conditional heteroscedasticity. Journal of Econometrics, 26, pp. 409–432.
KWIATKOWSKI, D., PHILLIPS, P. C. B., SCHMIDT, P., SHIN, Y., (1992). Testing the null hypothesis of stationarity against the alternative of unit root. Journal of Econometrics, 54, pp. 159–178.
LEE, J., STRAZICICH, M. C., (2003). Minimum Lagrange multiplier unit root test with two structural breaks. Review of Economic Statistics, 85, pp. 1082–1089.
LEE, Y-J., (2015). The stationarity of the inflation rate: Evidence from OECD countries. Master thesis. Institute of Economics, National Sun Yat-sen University.
LING, S., LI, W. K., MCALEER, M., (2003). Estimation and testing for unit root process with GARCH(1,1) errors: theory and Monte evidence. Econometric Reviews, 22, pp. 179–202.
LUMSDAINE, R. L., PAPELL, D. H., (1997). Multiple trend breaks and the unitroot hypothesis. Rev. Econ. Stat. 79, pp. 212–218.
MISHRA, V., SMYTH, R., (2014). Is monthly US natural gas consumption stationary? New evidence from a GARCH unit root test with structural breaks, Energy Policy, in press.
NARAYAN, P. K., NARAYAN, S., (2010). Is there a unit root in the inflation rate? New evidence from panel data models with multiple structural breaks. Applied Economics, 42 (13), pp. 1661–1670.
NARAYAN, P. K., POPP, S., (2010). A new unit root test with two structural breaks in level and slope at unknown time. Journal of Applied Statistics, 37, pp. 1425–1438.
NARAYAN, P. K., POPP, S., (2011). An application of a new seasonal unit root test to inflation. International Review of Economics and Finance, 20, pp. 707– 716.
NARAYAN, P. K., LIU, R., (2011). Are shocks to commodity prices persistent? Applied Energy, 88, pp. 409–416.
NARAYAN, P. K., LIU, R., (2015). A unit root model for trending time-series energy variables. Energy Economics, 50, pp. 391–402.
NARAYAN, P. K., LIU, R., WESTERLUND, J., (2016). A GARCH model for testing market efficiency. Journal of International Financial Markets Institutions and Money, 41, pp. 121–138.
NG, S., PERRON, P., (2001). Lag length selection and the construction of unit root tests with good size and power. Econometrica, 69, pp. 1519–1554.
NORIEGA, A. E., CAPISTRAN, C., RAMOS-FRANCIA, M., (2013). On the dynamics of inflation persistence around the world. Empirical Economics, 44, pp. 1243–1265.
PERRON, P., (1989). The Great Crash, the oil price shocks and the unit root hypothesis. Econometrica, 57, pp. 1361–1401.
PERRON, P., (2006). Dealing with structural breaks. Palgrave Handbook of Econometrics, 1, pp. 278–352.
PHILLIPS, P. C. B., PERRON, P., (1988). Testing for a unit root in time series regression. Biometrika, 75, pp. 335–346. POPP, S., (2007). Modified seasonal unit root test with seasonal level shifts at unknown time. Economics Letters, 97 (2), pp. 111–117.
ROMERO-ÁVILA, D., USABIAGA, C., (2009). The Hypothesis of a Unit Root in OECD Inflation Revisited. Journal of Economics and Business, 61, pp. 153– 161.
SALİSU, A. A., FASANYA, I. O., (2013). Modelling oil price volatility with structural breaks. Energy Policy, 52, pp. 554–62.
SALISU, A. A., MOBOLAJI, H., (2013). Modelling returns and volatility transmission between oil price and US-Nigeria exchange rate. Energy Economics, 39, pp. 169–76.
SALISU, A. A., ADELEKE, A. I., (2016). Further Application of Narayan and Liu (2015) unit root model for trending time series. Economic Modelling, 55, pp. 305–314.
SALISU, A. A., NDAKO, U. B., OLOKO, T. F., AKANNI, L. O., (2016). Unit root modelling for trending stock market series. Borsa Istanbul Review, 16-2, pp. 82–91.
SCHMIDT, P., PHILLIPS, P., (1992). LM Tests for a Unit Root in the Presence of Deterministic Trends. Oxford Bulletin of Economics and Statistics, 54, pp. 257–287.
ZHOU, S., (2013). Nonlinearity and stationarity of inflation rates: Evidence from the Euro-zone countries. Applied Economics, 45, pp. 849–856.
ZIVOT, E., ANDREWS, D. W. K., (1992). Further evidence on Great Crash, the oil price shock and the unit root hypothesis. Journal of Bus. Econ. Stat. 10, pp. 251–270.