An analysis of inflation rates in the european union using wavelets: strong evidence against unit roots

Abstract

In many fields of economic analysis the order of integration of some economic magnitudes is of particular interest. Among other aspects, the order of integration determines the degree of persistence of that magnitude. The rate of inflation is a very interesting example because many contradictory empirical results on the persistence of inflation rates can be found in the literature. Moreless, the persistence of inflation rates is of particular interest as much for the macro economy as for the taking of political decisions. Recently, Hassler and Wolters (1995) argue that these contradictions may be due to the fact that either process I(0) or I(1) are considered. In this paper we assume inflation rates in European Union countries may in fact be fractionally integrated. Given this assumption, we obtain estimations of the order of integration by means a method based on wavelets coefficients. Finally, results obtained allow reject the unit root hypothesis on inflation rates. It means that a random shock on the rate of inflation in these countries has transitory effects that gradually diminish with the passage of time, that this, said shock hasnt a permanent effect on future values of inflation rates.fractional integration, inflation rates, long memory