Yaya, OlaOluwa S
(2017):
*Another Look at the Stationarity of Inflation rates in OECD countries: Application of Structural break-GARCH-based unit root tests.*
Forthcoming in: Statistics in Transition

Preview |
PDF
MPRA_paper_88769.pdf Download (709kB) | Preview |

## Abstract

This paper re-investigates unit root hypotheses in inflation rates for 21 OECD countries using the newly proposed GARCH-based unit root tests with structural break and trend specifications. The results showed that classical tests over-accept unit roots in inflation rates, whereas these tests are not robust to heteroscedasticity. As observed from the pre-tests, those tests with structural break reject more null hypotheses of unit roots of most inflation series. By applying variants of GARCH-based unit root tests which include those with structural breaks and time trend regression specifications, we found that unit root tests without time trend gave most rejections of the conventional unit root. Thus, care should be taken while applying variants of the new unit root tests on weak trending time series as indicated in this work.

Item Type: | MPRA Paper |
---|---|

Original Title: | Another Look at the Stationarity of Inflation rates in OECD countries: Application of Structural break-GARCH-based unit root tests |

Language: | English |

Keywords: | Heteroscedasticity; Inflation rate; Structural breaks; Unit root; OECD countries |

Subjects: | C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables |

Item ID: | 88769 |

Depositing User: | Dr OlaOluwa Yaya |

Date Deposited: | 01 Sep 2018 17:22 |

Last Modified: | 26 Sep 2019 18:27 |

References: | Bai, J. and Perron, P. (2003). Computation and Analysis of Multiple Structural Change Models. Journal of Applied Econometrics, 18: 1–22. Basher, S.A. and Westerlund, J. (2008). In there really a unit root in the inflation rate? More evidence from panel data models. Applied Economics Letters, 15(3): 161-164. Bollerslev, T. (1986). Generalized Autoregressive Conditional Heteroscedasticity. Journal of Econometrics, 31: 307-327. Box, G.E.P., Jenkins, G.M. and Reinsel G.C. (2008). Time Series Analysis: Forecasting and Control. 4th ed. Wiley: Hoboken, New Jersey. Chang, T., Ranjbar, O. and Tang, D.P. (2013). Revisiting the mean reversion of inflation rates for 22 OECD countries. Economic Modelling, 30: 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: 109–116. Culver, S.E. and 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: 435-444. Dickey, D.A. and Fuller, W.A. 1979. Distribution of the Estimators for Autoregressive Time Series with a Unit Root. Journal of the American Statistical Association 74: 427-431. Dickey, D.A. and Fuller, W.A. (1981). Distribution of the estimators for autoregressive time series with a unit root. Econometrica 49, 1057–1072. Elliot, G., Rothenberg, T.J. and Stock, J.H. (1996). Efficient tests for an Autoregressive unit root. Econometrica, 64: 813-836. Fuller, W.A. (1976). Introduction to statistical Time Series. Wiley, New York. Gil-Alana, L.A., Yaya, O.S. and 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: 711-724. Gregoriou, A. and Kontonikas, A. (2009). Modelling the behaviour of inflation deviations from the target. Economic Modelling, 26: 90-95. Huang, H.-C., lin, P.-C. and Yeh, C.-C. (2010). Price level convergence across cities? Evidence from panel unit root tests. Applied Economics Letters, 18(1): 87-93. Kim, k. and Schmidt, P. (1993). Unit root tests with conditional heteroscedasticity. Journal of Econometrics, 26: 409-432. Kwiatkowski, D., Phillips, P.C.B., Schmidt, P. and Shin, Y. (1992). Testing the null hypothesis of stationarity against the alternative of unit root. Journal of Econometrics, 54: 159-178. Lee, J. and Strazicich, M.C. (2003). Minimum Lagrange multiplier unit root test with two structural breaks. Review of Economic Statistics, 85: 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. and McAleer, M. (2003). Estimation and testing for unit root process with GARCH(1,1) errors: theory and Monte evidence. Econometric Reviews, 22: 179-202. Lumsdaine, R.L. and Papell, D.H. (1997). Multiple trend breaks and the unit-root hypothesis. Rev. Econ. Stat. 79: 212–218. Mishra, V. and 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. and 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): 1661-1670. Narayan, P.K. and Popp, S. (2010). A new unit root test with two structural breaks in level and slope at unknown time. Journal of Applied Statistics, 37: 1425–1438. Narayan, P.K. and Popp, S. (2011). An application of a new seasonal unit root test to inflation. International Review of Economics and Finance, 20: 707-716. Narayan, P.K. and Liu, R. (2011). Are shocks to commodity prices persistent? Applied Energy, 88: 409-416. Narayan, P. K. and Liu, R. (2015). A unit root model for trending time-series energy variables. Energy Economics, 50: 391-402. Narayan, P.K., Liu, R. and Westerlund, J. (2016). A GARCH model for testing market efficiency. Journal of International Financial Markets Institutions and Money, 41: 121-138. Ng, S. and Perron, P. (2001). Lag length selection and the construction of unit root tests with good size and power. Econometrica, 69: 1519-1554. Noriega, A.E., Capistran, C. and Ramos-Francia, M. (2013). On the dynamics of inflation persistence around the world. Empirical Economics, 44: 1243-1265. Perron, P. (1989). The Great Crash, the oil price shocks and the unit root hypothesis. Econometrica, 57: 1361-1401. Perron, P. (2006). Dealing with structural breaks. Palgrave Handbook of Econometrics, 1, 278-352. Phillips, P.C.B. and Perron, P. (1988). Testing for a unit root in time series regression. Biometrika, 75: 335–346. Popp, S. (2007). Modified seasonal unit root test with seasonal level shifts at unknown time. Economics Letters, 97(2): 111-117. Salisu, A.A. and Fasanya, I.O. (2013) Modelling oil price volatility with structural breaks. Energy Policy, 52, 554-62. Salisu, A.A. and Mobolaji, H. (2013). Modelling returns and volatility transmission between oil Price and US-Nigeria exchange rate. Energy Economics, 39, 169-76. Salisu, A.A. and Adeleke, A.I. (2016). Further Application of Narayan and Liu (2015) unit root model for trending time series. Economic Modelling, 55, 305-314. Salisu, A.A., Ndako, U.B., Oloko, T.F. and Akanni, L.O. (2016). Unit root modelling for trending stock market series. Borsa Istanbul Review, 16-2: 82-91. Zhou, S. (2013). Nonlinearity and stationarity of inflation rates: Evidence from the Euro-zone countries. Applied Economics, 45: 849-856. Zivot, E. and 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: 251–270. |

URI: | https://mpra.ub.uni-muenchen.de/id/eprint/88769 |