Intrinsic Inflation Persistence in a Developing Country

Hanif, Muhamad Nadim and Malik, Muhamad Jahanzeb and Iqbal, Javed (2012): Intrinsic Inflation Persistence in a Developing Country.

Abstract

This study estimates degree of intrinsic inflation persistence in Pakistan using aggregate price index, group level price indices, and individual commodity prices. We find no evidence of a unit root in (MoM) inflation at any level, except for house rent. Using monthly data from 1959 to 2011 we find that the estimate of (overall) inflation persistence is 0.16, which is low but significant. During 2001-2011 (overall) inflation persistence is insignificant. Food inflation does not exhibit any persistence during the last decade. However, the degree of persistence is very high (0.80) and significant for core inflation (NFNE), which weakens slightly (to 0.69) when we account for commodities price shock of 2008. At micro level, the estimated degree of inflation persistence for various groups is found to be relatively higher, in almost 60 percent of the cases, compared to corresponding degree of persistence at aggregate level. This may be because in micro analysis we consider only those commodities for which the estimated degree of inflation persistence is significant.

• Item Type: MPRA Paper
• Language: English
• Keywords: Persistence, Inflation, Food Inflation, Core Inflation
• Subjects: C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C13 - Estimation: General; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation

References

Akaike, H. (1969). “Fitting Autoregressive models for prediction,” Annals of the Institute of Statistical Mathematics, Volume 21, pp. 243-247

Altissimo, F., M. Ehrmann, and F. Smets (2006). “Inflation Persistence and Price-setting Behaviour in Euro Area: A Summary of IPN Evidence,” European Central Bank Occasional Paper No 46

Angeloni, I., J. Gali,, L. Aucremanne, A. Levin, E. Ehrmann, and F. Smets (2006). “New Evidence on Inflation Persistence And Price Stickiness In The Euro Area: Implications For Macro Modeling,” Journal of the European Economic Association April-May 2006 4(23):562–574

Batini, N. (2002). “Euro area inflation persistence”, ECB, WP No.201

Batini, N., E. Nelson (2002). “The Lag from Monetary Policy Actions to Inflation: Friedman revisited”, Bank of England, Discussion Paper No.6;

Bilke, L. (2005). “Break in the Mean and Persistence of Inflation: A Sectoral Analysis of French CPI,” ECB Working Paper No. 463

Cecchetti., S and G. Debelle (2005). “Has the Inflation Process Changed?” BIS Working Papers No 185

Choudhary, M.A., S. Naeem, A. Faheem, N. Hanif, and F. Pasha (2011). “Formal Sector Price Discoveries: Preliminary Results for a Developing Country,” SBP Working Paper No 42, and Surrey University Discussion Paper No. 10/11

Chow, C. Gregory (1960). “Tests of equality between sets of coefficients in two linear regressions,” Econometrica, Vol. 28, No. 3 pp. 591-605

Cogley, T. and T.J. Sargent (2001). “Evolving Post-World War II US Inflation Dynamics,” in NBER Macroeconomics Annual 2001 (Eds) B. S. Bernanke and K. Rogoff, MIT Press, Cambridge, MA

Cutler, J. (2001). “A New Measure of Core Inflation in the U.K.”, MPC Unit Discussion, Paper No. 3 (London: Bank of England).

Fuhrer, J.C. (2009). “Inflation Persistence,” Working Paper No. 09-14 of Federal Reserve Bank of Boston

Galí, J. and M. Gertler (1999). “Inflation Dynamics: A Structural Econometric Analysis, Journal of Monetary Economics 44(2), 195-222. Gupta, S., and M. Saxegaard (2009). “Measures of Underlying inflation in Sri Lanka”, IMF Working Paper No. 09/167

Im, K. S., M. H. Pesaran, and Y. Shin (2003). “Testing for Unit Roots in Heterogeneous Panels,” Journal of Econometrics, 115, 53–74

Kim, C. J., C.R. Nelson and J. Piger (2004). “The less volatile US economy: A Bayesian investigation of timing, breadth, and political examination,” Journal of Business and Economic Statistics, 22, pp 80-93

Khundrakpam, J. K. (2008). “How Persistent is Indian Inflationary Process, Has it Changed?” Reserve Bank of India Occasional Papers, Vol. 29, No. 2, Monsoon, pp. 23-45

Kota, V. (2011). “The Persistence of Inflation in Albania,” Special Conference Paper No. 3, Bank of Greece

Levin, A and J. Piger (2003). “Is Inflation Persistence intrinsic in industrial economies?”, Federal Reserve Bank of St. Louis working paper 2002-023

Levin, A. and J. Piger (2004). “Is Inflation Persistence Intrinsic in Industrial Countries?” The Federal Reserve Bank of Saint Louis, Working Paper No. 023E

Levin, A., C. F. Lin, and C. Chu (2002). “Unit Root Tests in Panel Data: Asymptotic and Finite-Sample Properties,” Journal of Econometrics, 108, 1–24

Marques, C (2004). “Inflation Persistence: Facts or Artefacts?” ECB Working paper No 371, June 2004

O‟Reilly, G. and K. Whelan (2005). “Has Euro area inflation persistence changed over time?,” The Review of Economics and Statistics, 87, pp. 709-20

Osborn, D. and M. Sensier (2009). “UK inflation: persistence, seasonality and Monetary Policy,” Scottish Journal of Political Economy, Volume 56(1), pp. 24-44

Pakistan, Federal Bureau of Statistics (2006). Census of Manufacturing Industries in Pakistan, Islamabad

Pivetta, F. and R. Reis (2007). “The persistence of inflation in the United States”, Journal of Economic Dynamics and Control, 31, 1326-1358

Schwarz, G. (1978). “Estimating the dimension of a model,” The Annals of Statistics, 6(2), pp. 461-4

Stock, J. (2001). “Comment evolving post World War II US inflation dynamics,” in NBER Macroeconomics Annual 2001 (Eds) B. S. Bernanke and K. Rogoff, MIT Press, Cambridge, MA, pp. 379-87