Mean reversion of inflation rates in seven Eastern European countries: An application of a fourier quantile unit root test

ABSTRACT

This paper applies recently developed Fourier quantile unit root test to investigate time-series property of inflation in seven Eastern European countries. This method combines the quantile unit root test with smooth unknown multiple breaks through Fourier function, and has good size and power when the data follows heavy tailed distribution. Our results show that the inflation rates are stationary within each quantile for Czech Republic, Bulgaria and Lithuania, while the other four countries contain a unit root within some quantiles. We also find the speed of inflation adjustment towards to its long-run equilibrium for each country is asymmetric. Our results have important policy implications for monetary authorities in these Eastern European countries.

KEYWORDS:

• Inflation
• quantile unit root test
• structural change
• Fourier function

JEL CLASSIFICATION:

• C22, E20, E31

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. The persistence of inflation can be interpreted as the speed of convergence for inflation to return to its long-run equilibrium level. The slower the speed, the higher persistent is inflation and vice versa.

2. We perform the Fourier quantile unit root test using the GAUSS 9 software.

Additional information

Funding

China Postdoctoral Science special Foundation [grant number 2016T90645]; Social Science foundation of Shandong Province, China [grant number 15DJJJ20]; Postdoctoral Innovation Foundation of Shandong Province, China [grant number 201503002].