Are Inflation Rates Mean-reverting Processes? Evidence from Six Asian Countries

Abstract

This paper tests for the (non)stationarity of inflation in six Asian countries, that is, Indonesia, Malaysia, the Philippines, Thailand, Singapore and India, by considering the possibility of structural breaks and nonlinearity. The results are mixed when a battery of conventional linear unit root tests is used. However, the inflation rate is shown to be a stationary process after considering the structural breaks and nonlinear properties of the threshold and exponential smooth transition. The mean reversion in inflation favors the hypothesis of the natural rate of inflation and the sticky-price model, indicating that any shock has a transitory effect on inflation. The implication of stationary inflation is that any shock has a transitory effect on inflation.