Is inflation mean-reverting?

This paper investigates whether inflation series are mean-reverting. Traditional unit root tests (ADF and KPSS tests) are conducted in the paper. These tests indicate that inflation contains a unit root. It is however well-known that traditional unit root tests have difficulties to distinguish between a unit root process and a fractionally integrated process. Hence, in this thesis, fractional integration estimators are used in order to investigate if inflation is better modeled as a fractionally integrated process. The main finding of this paper is that inflation with a high certainty is fractionally integrated and mean-reverting. Another important finding is that the persistence in inflation series likely was lower during the Bretton-Woods era relative the years after the system collapsed. Moreover, the findings in the paper do not crucially depend on which fractional integration estimator that are used.