ANOTHER LOOK AT THE STATIONARITY OF INFLATION RATES IN OECD COUNTRIES: APPLICATION OF STRUCTURAL BREAK-GARCH-BASED UNIT ROOT TESTS

Abstract The need to understand the stationarity property of inflation of any country is paramount in the design of monetary targeting policy. In this paper, unit root hypotheses of inflation rates in 21 OECD countries are investigated using the newly proposed GARCH-based unit root tests with structural break and trend specifications. The results show that classical tests over-accept unit roots in inflation rates, whereas these tests are not robust to heteroscedasticity. As it is observed from the pre-tests, those tests with structural break reject more null hypotheses of unit roots of most inflation series than those without structural breaks. By applying variants of GARCH-based unit root tests, which include those with structural breaks and time trend regression specifications, we find that unit root tests without time trend give most rejections of the conventional unit roots. Thus, care should be taken while applying variants of the new unit root tests on weak trending time series as indicated in this work. Batteries of unit root tests for discriminating between stationarity and nonstationarity of inflation rates are recommended, since in the case of over-differenced series, wrong policy decision will be made, particularly when inflation series is considered in a cointegrating relationship with other variables.