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Persistence in Inflation: Long Memory, Aggregation, or Level Shifts?

This paper examines persistence in inflation rates using CPI and WPI based inflation series of the Turkish economy. The inflationary process in Turkey is believed to be highly inertial, which should lead to strongly persistent inflation series. Persistence of 84 inflation series at different aggregation levels are examined by estimating models that allow long memory through fractional integration. The order of fractional differencing is estimated using several semiparametric and approximate maximum likelihood methods. We find that inflation series at the highest aggregation level show strong persistence. However, the data at lower aggregation levels show no significant persistence. Thus, paper finds evidence of spurious long memory due to aggregation. The paper also examines possibility of spurious long memory due to level shifts by estimating ARFIMA models that allow stochastic permanent breaks. We find that all aggregate inflation series are antipersistent, if the effects of stochastic level shifts are taken into account.