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Convergence of Prices and Rates of Inflation *
Author(s) -
Busetti Fabio,
Fabiani Silvia,
Harvey Andrew
Publication year - 2006
Publication title -
oxford bulletin of economics and statistics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.131
H-Index - 73
eISSN - 1468-0084
pISSN - 0305-9049
DOI - 10.1111/j.1468-0084.2006.00460.x
Subject(s) - unit root , econometrics , inflation (cosmology) , autoregressive model , economics , convergence (economics) , statistic , unit root test , series (stratigraphy) , price index , monte carlo method , test statistic , mathematics , statistics , cointegration , statistical hypothesis testing , macroeconomics , paleontology , physics , biology , theoretical physics
We consider how unit‐root and stationarity tests can be used to study the convergence of prices and rates of inflation. We show how the joint use of these tests in levels and first differences allows the researcher to distinguish between series that are converging and series that have already converged, and we set out a strategy to establish whether convergence occurs in relative prices or just in rates of inflation. Special attention is paid to the issue of whether a mean should be extracted in carrying out tests in first differences and whether there is an advantage to adopting a (Dickey–Fuller) unit‐root test based on deviations from the last observation. The asymptotic distribution of this last test statistic is given and Monte Carlo simulation experiments show that the test yields considerable power gains for highly persistent autoregressive processes with ‘relatively large’ initial conditions. The tests are applied to the monthly series of the consumer price index in the Italian regional capitals over the period 1970–2003.