Cointegration with structural changes and classical model of inflation in Spain, 1830–1998

In this article, we test a classical model of inflation with rational expectations for the case of Spain during the period 1830–1998. The principal testable implication is that money growth and inflation are cointegrated ruling out speculative bubbles. First, to detect episodes of potential explosive behaviour in the Spanish inflation rate, we use the recursive unit root tests for explosiveness recently proposed by Phillips et al. (2011), and Phillips et al. (2015a, 2015b). Second, we consider the possibility that a linear cointegrated regression model with multiple structural changes would provide a good empirical description of the classical model of inflation for Spain over this long period. Our methodology is based on the instability tests recently proposed in Kejriwal and Perron (2008, 2010) as well as the cointegration tests developed in Arai and Kurozumi (2007) and Kejriwal (2008).