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Nonlinearity In Inflation, A Case of Pakistan

Author

Listed:
  • Iqbal, Javed
  • Rehman, Muhammad
  • Ur-Rehman, Hafeez

Abstract

Recent research work has shown that inflation rate is asymmetric and it is also well known that asymmetry is a non-linear phenomenon. In order to better understand this non-linearity in inflation of Pakistan, we investigate the possible presence of Smooth Transition Autoregressive (STAR) non-linearity in inflation series. The study finds that month on month inflation series for Pakistan possesses both logistic and exponential STAR type non-linearity. Exponential Smooth transition function was proven to be more relevant on the basis of Dijk et al. (2000). Therefore, we develop ESTAR model in this paper which outperforms its linear rivals in forecasting.

Suggested Citation

  • Iqbal, Javed & Rehman, Muhammad & Ur-Rehman, Hafeez, 2011. "Nonlinearity In Inflation, A Case of Pakistan," MPRA Paper 35858, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:35858
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    References listed on IDEAS

    as
    1. Kapetanios, George & Shin, Yongcheol & Snell, Andy, 2003. "Testing for a unit root in the nonlinear STAR framework," Journal of Econometrics, Elsevier, vol. 112(2), pages 359-379, February.
    2. Potter, Simon M, 1999. "Nonlinear Time Series Modelling: An Introduction," Journal of Economic Surveys, Wiley Blackwell, vol. 13(5), pages 505-528, December.
    3. Simon Potter, 1999. "Nonlinear Time Series Modelling: An Introduction," Journal of Economic Surveys, Wiley Blackwell, vol. 13(5), pages 505-528, December.
    4. Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, vol. 14(1-2), pages 3-24, February.
    5. Stephen Leybourne & Paul Newbold & Dimitrios Vougas, 1998. "Unit roots and smooth transitions," Journal of Time Series Analysis, Wiley Blackwell, vol. 19(1), pages 83-97, January.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Inflation; Pakistan; ESTAR model;
    All these keywords.

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • C87 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Econometric Software

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