The dynamics of inflation: a study of a large number of countries

Over the last twenty years the statistical properties of inflation persistence has been the subject of intense investigation and debate without reaching a unanimous conclusion yet. In this paper we attempt to shed further light to this debate using a battery of econometric techniques in order to provide robust evidence on the degree of inflation persistence and whether this has changed during the period in which several countries have followed inflation-targeting regimes or new monetary regimes. We consider the inflation rates of thirty developed and emerging economies using quarterly data for the period 1958-2007 which includes alternative monetary policy regimes. The coefficient of the inflation parameter was estimated by OLS, ARMA and ARFIMA models. Furthermore, the grid-bootstrap median unbiased estimator approach developed by Hansen (1999) was employed to estimate the finite sample OLS estimates coupled with the 95% percent symmetric confidence interval. We also examine parameter stability of persistence coefficients by estimating a model with time-varying parameters and we provide evidence that the AR coefficient has remained in most cases and for several periods high although there is a tendency for lower inflation persistence in the last decade. This finding is more evident for the case of the EMU countries since the adoption of the euro. These results are further complemented by the use of rolling and recursive regressions and we argue that for a number of countries there is a tendency for a decrease in persistence in the late 1990s and during the 2000s and this downturn may be the result of a shift in monetary policy.