Convergence of Prices and Rates of Inflation

15 Pages Posted: 24 Nov 2006

See all articles by Fabio Busetti

Fabio Busetti

Bank of Italy

Silvia Fabiani

Bank of Italy

Andrew Harvey

University of Cambridge - Department of Applied Economics

Abstract

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.

Suggested Citation

Busetti, Fabio and Fabiani, Silvia and Harvey, Andrew, Convergence of Prices and Rates of Inflation. Oxford Bulletin of Economics and Statistics, Vol. 68, No. S1, pp. 863-877, December 2006. Available at SSRN: https://ssrn.com/abstract=947015 or http://dx.doi.org/10.1111/j.1468-0084.2006.00460.x

Fabio Busetti (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy
39 06 479 23245 (Phone)
39 06 474 7820 (Fax)

Silvia Fabiani

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Andrew Harvey

University of Cambridge - Department of Applied Economics ( email )

Sidgwick Avenue
Cambridge, CB3 9DE
United Kingdom
+44 1223 335 228 (Phone)
+44 1223 335 475 (Fax)

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