A Study of Testing Mean Reversion in the Inflation Rate of Iran’s Provinces: New Evidence Using Quantile Unit Root Test

Author

Department of Economics, Qazvin Branch, Islamic Azad University, Qazvin, Iran.

Abstract

This paper examines the mean-reverting properties of inflation rates for Iran’s 25 provinces from 1990:4 to 2017:7. To the end, we use various conventional univariate linear and non-linear unit root tests, as well as a quantile unit root test by Koenker and Xiao (2004). The results of conventional unit root tests indicate that the unit root test null hypothesis is accepted for most of the inflation rate series. Using the quantile unit root test, we found that the null hypothesis of the unit root test is rejected for all inflation rate series globally. But the mean-reverting properties are rejected at low quantiles. The empirical results have important policy implications.

Keywords


Bahmani-Oskooee, M. (1995). Source of Inflation in Post-Revolutionary Iran. International Economic Journal, 9, 61-72.
Bahmani-Oskooee, M., Chang, T., & Ranjbar, O. (2017). The Fourier Quantile Unit Root Test with an Application to the PPP Hypothesis in the OECD. Applied Economics Quarterly, 63(3), 295-317.
Bolat, S., Tiwari, A. K., & Kyophilavong, P. (2017). Testing the Inflation Rates in MENA Countries: Evidence from Quantile Regression Approach and Seasonal Unit Root Test. Research in International Business and Finance, 42, 1089-1095.
 
Cagan, P. (1956). The Monetary Dynamics of Hyperinflation. In M. Friedman (Ed.), Studies in the Quantity Theory of Money (25-117). Chicago: Chicago University Press.
Calvo, G. (1983). Staggered Prices in a Utility-maximizing Framework. Journal of Monetary Economics, 12(3), 383-398.
Campbell, J. Y., & Perron, P. (1991). Pitfalls and Opportunities: What Macroeconomists Should Know about Unit Roots? NBER Macroeconomics Annual, Retrieved from
https://www.journals.uchicago.edu/doi/pdfplus/10.1086/654163.
Carrion-i Silvestre, J. L., Del Barrio-Castro, T., & Lopez-Bazo, E. (2005). Breaking the Panels: An Application to the GDP Per Capita. Econometrics Journal, 8, 159–175.
Chang, Y. (2002). Nonlinear IV Unit Root Tests in Panels with Cross-sectional Dependency. Journal of Econometrics, 110, 261–292.
Charemza, W. W., & Hristova, D. (2005). Is Inflation Stationary. Applied Economics, 37, 901–903.
Culver, S. E., & Papell, D. H. (1997). Is There a Unit Root in the Inflation Rate? Evidence from Sequential Break and Panel Data Models. Journal of Applied Econometrics, 12(4), 435–444.
Deng-Kui, S., & Xiao-Lin, L. (2017). Mean Reversion of Inflation Rates in Seven Eastern European Countries: An Application of a Fourier Quantile Unit Root Test. The Journal of International Trade & Economic Development, 21, 102-123.
Dickey, D. A., & Fuller, W. A. (1979). Distribution of the Estimators for Autoregressive Time Series   With a Unit Root. Journal of the American Statistical Association, 74, 427–431.
 
Fisher, I. (1930). The Theory of Interest. New York: Macmillan.
Gaglianone, W. P., de Carvalho Guillén, O. T., & Figueiredo, F. M. R. (2018). Estimating Inflation Persistence by Quantile Autoregression with Quantile-specific Unit Roots. Economic Modelling, 73, 407-430.
Hansen, B. E. (1999). The Grid Bootstrap and the Autoregressive Model. The Review of Economics and Statistics, 81(4), 594-607.
Ho, T. W. (2008). The Inflation Rates May Accelerate After All: Panel Evidence from 19 OECD Economies. Empirical Economics, 36(1), 55-64.
Im, K. S., Pesaran, M. H., & Shin, Y. (2003). Testing for Unit Roots in Heterogeneous Panels. Journal of Econometrics, 115(1), 53–74.  
Kandil Magda., & Mirzaie Ida A. (2017). Iran’s Inflationary Experience: Demand Pressures External Shocks and Supply Constraints. Review of Middle East Economics and Finance, 13(2), 1-19.
Kapetanios, G., Shin, Y., & Snell, A. (2003). Testing for a Unit Root in the Nonlinear STAR Framework. Journal of Econometrics, 112, 359-379.
Koenker, R., & Xiao, Z. (2004). Unit Root Quantile Autoregression Inference. Journal of the American Statistical Association, 99, 775–787.
Kwiatkowski, D., Phillips, P., Schmidt, P., & Shin, Y. (1992). Testing the Null Hypothesis of Stationarity Against the Alternative of a Unit Root: How Sure Are We That Economic Time Series Have a Unit Root. Journal of Econometrics, 54(1-3), 159-178.
 
Lee, C. C., & Chang C. P. (2007). Mean Reversion of Inflation Rates in 19 OECD Countries: Evidence from Panel LM Unit Root Tests with Structural Breaks. Economics Bulletin, 23(3), 1-15.
Lee, H. Y., & Wu, J. L. (2001). Mean Reversion of Inflation Rates: Evidence from 13 OECD Countries. Journal of Macroeconomics, 23(3), 477–487.
Levin, A., & Lin, C. F. (1992). Unit Root Test in Panel Data: Asymptotic and Finite Sample Properties. Discussion Paper, Retrieved from https://www.researchgate.net/.
Mishkin, F. S. (1992). Is the Fisher Effect for Real? A Reexamination of the Relationship Between Inflation and Interest Rates. Journal of Monetary Economics, 30, 195-215.
Narayan, P. K., & Narayan, S. (2010). Is There a Unit Root in the Inflation Rate? New Evidence from Panel Data Models with Multiple Structural Breaks. Applied Economics, 42(13), 1661-1670.
Ng, S., & Perron, P. (2001). Lag Length Selection and the Construction of Unit Root Tests with Good Size and Power. Econometrica, 69(6), 1519–1554.
Perron, P., & Vogelsang, T. J. (1992). Nonstationarity and Level Shifts with an Application to Purchasing Power Parity. Journal of Business and Economic Statistics, 10, 301–320.
Rapach, D. E., & Wohar, M. E. (2004). The Persistence in International Real Interest Rates. International Journal of Finance and Economics, 9(4), 339-346.
Si, Deng-Kui., &  Li, Xiao-Lin. (2017). Mean Reversion of Inflation Rates in Seven Eastern European Countries: An Application of a Fourier Quantile Unit Root Test. The Journal of International Trade & Economic Development, Retrieved from
https://www.tandfonline.com/doi/full/10.1080/09638199.2017.1350200?scroll=top&needAccess=true.
Sollis, R. (2009). A Simple Unit Root Test Against Asymmetric STAR Nonlinearity with an Application to Real Exchange Rates in Nordic Countries. Economic Modelling, 26, 118–125.
Tsong, C. -C., &  Lee, C. -F. (2011). Asymmetric Inflation Dynamics: Evidence from Quantile Regression Analysis. Journal of Macroeconomics, 33(4), 668-680.
Wolters, M., & Tillman, P. (2015). The Changing Dynamics of US Inflation Persistence: A Quantile Regression Approach. Studies in Nonlinear Dynamics and Econometrics, 19(2), 161-182.
Zhang, C. (2013). Monetary Dynamics of Inflation in China. The World Economy, 36(6), 737-760.