Inflation Revisited: New Evidence from Modified Unit Root Tests
نویسندگان
چکیده
We propose a simple modification to the general-to-specific lag-length selection method typically employed in a standard augmented Dickey-Fuller (ADF) test and apply it to examine the stationarity of OECD countries’ inflation rates. Instead of using the entire set of lags selected by the general-to-specific method, we suggest using only the lags that are statistically significant. Our Monte Carlo experiments show that the modified test has superior power to the standard ADF test with only minor size distortions. The power of the Dickey-Fuller generalized least squares (DFGLS) test can also be improved by discarding insignificant intermediate lags. The appropriate use of the modified test is illustrated by using the inflation rates of OECD countries. Our results point out that shocks to many OECD countries’ inflation rates are temporary instead of permanent.
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