Testing for Multiple Bubbles in Inflation for Pakistan

Butt, Muhammad Danial and Ahmed, Mumtaz (2019): Testing for Multiple Bubbles in Inflation for Pakistan.

Abstract

Detection of bubbles in financial markets is an issue of great importance as these split an enduring impact to every sector of the economy leading to substantial losses. In Pakistan, price level has seen abrupt changes which hurts the economic efficiency whereas inflation rates are usually high. So, it is important to detect bubbles present in inflation to have a check whether the hike in inflation is demand driven or there is a prevailing price exuberant behavior that results in sudden boom in inflation. There are very limited studies on detecting bubbles in inflation series for Pakistan. So, the present study takes a lead and address this very important issue by making use of recently developed state of art GSADF approach proposed by Phillips et al. (2015). The empirical analysis is based on five different series which cover inflation rates such as consumer price index (CPI) for the general, the food and the non-food items, the sensitive price index (SPI) and the wholesale price index (WPI). This approach is best suited for testing multiple bubbles as opposed to earlier methods that are designed to test for the presence of only a single bubble in any time series. The empirical findings based on monthly time series data from Jan 2006 to Jan 2019 confirm the existence of multiple bubbles in WPI and CPI non-food. However, for rest of three series, only single bubble has been witnessed. The analysis from the date stamping of bubbles reveal that all bubbles arise during the global financial crisis of 2008 which triggered oil prices resulting in domestic currency depreciation. Some important policy implications are discussed as well.

• Item Type: MPRA Paper
• Language: English
• Keywords: Explosivity; Consumer price index; Wholesale price index, Sensitive price index; GSADF; Simulation
• Subjects: E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation; G - Financial Economics > G0 - General > G00 - General; P - Economic Systems > P2 - Socialist Systems and Transitional Economies > P24 - National Income, Product, and Expenditure ; Money ; Inflation; P - Economic Systems > P4 - Other Economic Systems > P44 - National Income, Product, and Expenditure ; Money ; Inflation

References

Ahmed, E., & Rosser Jr, J. B. (1995). Non-linear speculative bubbles in the Pakistani stock market. The Pakistan Development Review, 25-41.

Ahmed, E., Rosser Jr, J. B., & Uppal, J. Y. (2016). A raging bull or a long-term speculative bubble? The puzzling case of the Karachi Stock Exchange. The Pakistan Development Review, 55(2), 79-93.

Areal, F.J., Balcombe, K., Rapsomanikis, G., 2014. Testing for bubbles in agricultural commodity markets. ESA Working Paper. 14

Balcilar, M., Katzke, N., & Gupta, R. (2018). Date-stamping US housing market explosivity. Economics: The Open-Access, Open-Assessment E-Journal, 12(2018-18), 1-33.

Barbosa, F. H., & da Silva Filho, T. N. T. (2015). Bubble, weak and strong hyperinflation: Theory and evidence. Economia, 16, 145–156.

Belke, A., & Wiedmann, M. (2005). Boom or bubble in the US real estate market? Inter economics, 40(5), 273-284.

Bettendorf, T., & Chen, W. (2013). Are there bubbles in the Sterling-dollar exchange rate? New evidence from sequential ADF tests. Economics Letters, 120(2), 350-353.

Bohl, M. T. (2003). Periodically collapsing bubbles in the US stock market? International Review of Economics & Finance, 12(3), 385-397.

Brooks, C., & Katsaris, A. (2003). Rational speculative bubbles: an empirical investigation of the London Stock Exchange. Bulletin of Economic Research, 55(4), 319-346.

Brooks, C., Katsaris, A., McGough, T., & Tsolacos, S. (2001). Testing for bubbles in indirect property price cycles. Journal of Property Research, 18(4), 341-356.

Campbell, Lo, MacKinlay, C., 1997. The Econometrics of Financial Markets. Princeton University Press.

Casella, A. (1989). Testing for rational bubbles with exogenous or endogenous fundamentals: the German hyperinflation once more. Journal of Monetary Economics, 24(1), 109-122.

Caspi, I., Katzke, N., & Gupta, R. (2018). Date stamping historical periods of oil price explosivity: 1876–2014. Energy Economics, 70, 582-587.

Cheah, E. T., & Fry, J. (2015). Speculative bubbles in Bitcoin markets? An empirical investigation into the fundamental value of Bitcoin. Economics Letters, 130, 32-36.

Cheung, A., Roca, E., & Su, J. J. (2015). Crypto-currency bubbles: an application of the Phillips–Shi–Yu (2013) methodology on Mt. Gox bitcoin prices. Applied Economics, 47(23), 2348-2358.

Diba, B, and H Grossman August 1987. On the inception of rational bubbles. Quarterly Journal of Economics: 697–700. Diba, B. T., & Grossman, H. I. (1988). The theory of rational bubbles in stock prices. The Economic Journal, 98(392), 746-754.

Diakoumi, P. (2015). Testing for bubbles in EU and US property markets.

Dickey, D. A., and W. A. Fuller (1979): Distribution of the Estimators for Autoregressive Time Series with a Unit Root, Journal of the American Statistical Association, 74, 427-431.

Engsted, T., Hviid, S. J., & Pedersen, T. Q. (2016). Explosive bubbles in house prices? Evidence from the OECD countries. Journal of International Financial Markets, Institutions and Money, 40, 14-25.

Flood, R. P., & Garber, P. M. (1980). Market fundamentals versus price-level bubbles: the first tests. Journal of political economy, 88(4), 745-770.

Fry, J., & Cheah, E. T. (2016). Negative bubbles and shocks in cryptocurrency markets. International Review of Financial Analysis, 47, 343-352.

Galí, J., & Gambetti, L. (2015). The effects of monetary policy on stock market bubbles: Some evidence. American Economic Journal: Macroeconomics, 7(1), 233-257.

Goodman, A. C., & Thibodeau, T. G. (2008). Where are the speculative bubbles in US housing markets? Journal of Housing Economics, 17(2), 117-137.

Gürkaynak, R. S. (2008). Econometric tests of asset price bubbles: taking stock. Journal of Economic surveys, 22(1), 166-186.

Fatima, H., & Mumtaz Ahmed. (2019). Testing for Exuberance Behavior in Agricultural Commodities of Pakistan. MPRA Working Paper.

Jiang, C., Wang, Y., Chang, T., & Su, C. W. (2015). Are there bubbles in Chinese RMB–dollar exchange rate? Evidence from generalized sup ADF tests. Applied Economics, 47(56), 6120-6135.

Kindle Berger, P C. Bubbles (1992). Hounds mill: New Palgrave Dictionary of Economics.

Kivedal, B. K. (2013). Testing for rational bubbles in the US housing market. Journal of Macroeconomics, 38, 369-381.

LeRoy, S, and R Porter. The present-value relation: tests based on implied variance bounds. Econometrica, May 1981: 555–574.

Liu, T. Y., Chang, H. L., Su, C. W., & Lobonţ, O. R. (2017). Is there inflation in China? Evidence by a unit root approach. International Review of Economics & Finance, 52, 236-245.

Liu, W. C., & Chang, T. (2008). Rational Bubbles in the Korea Stock Market? Further Evidence based on Nonlinear and Nonparametric Cointegration Tests. Economics Bulletin, 3(34), 1-12.

Noor, A., & Chaudhary, M. A. (2009). Economic Management and Roots of Inflation in Pakistan. Economic Management, 5, 17-34.

Pakistan Economic Survey (2007,2008,2017,2018), Government of Pakistan, Ministry of Finance, Economic Advisory Wing, Islamabad

Phillips, P. C. B.; Perron, P. (1988). Testing for a Unit Root in Time Series Regression. Biometrika. 75 (2): 335–346.

Phillips, P. C., & Yu, J. (2011). Dating the timeline of financial bubbles during the subprime crisis. Quantitative Economics, 2(3), 455-491.

Pavlidis, E. G., Paya, I., & Peel, D. A. (2017). Testing for speculative bubbles using spot and forward prices. International Economic Review, 58(4), 1191-1226.

Phillips, P. C., Shi, S., & Yu, J. (2015). Testing for multiple bubbles: Historical episodes of exuberance and collapse in the S&P 500. International Economic Review, 56(4), 1043-1078.

Phillips, P. C., Wu, Y., & Yu, J. (2011). Explosive behavior in the 1990s Nasdaq: When did exuberance escalate asset values. International economic review, 52(1), 201-226.

Shi, S., Valadkhani, A., Smyth, R., & Vahid, F. (2016). Dating the timeline of house price bubbles in Australian capital cities. Economic Record, 92(299), 590-605.

Shih, Y. N., Li, H. C., & Qin, B. (2014). Housing price bubbles and inter-provincial spillover: Evidence from China. Habitat International, 43, 142-151.

Shiller, Robert J. "Do Stock Prices Move Too Much to Be Justified by Subsequent Changes in Dividends?" The American Economic Review, June 1981: PP. 421-436.

State Bank of Pakistan, Monthly Reports on inflation monitor, Karachi.

Welch, J. H. (1991). Rational inflation and real internal debt bubbles in Argentina and Brazil? (No. 9113). Federal Reserve Bank of Dallas.

Wu, Y. (1995). Are there rational bubbles in foreign exchange markets? Evidence from an alternative test. Journal of International Money and Finance, 14(1), 27-46.

Zeren, F., Ergüzel, O. Ş., and Ass, R. (2015). Testing for bubbles in the housing market: Further evidence from Turkey. Journal of Financial Studies, 19(1), 40-52.