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PERMANENT AND TEMPORARY PRICE VARIATIONS: A Decomposition Analysis based on Stochastic Forecasting Models

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  • Eatzaz AHMAD
  • Sheena Naz ALI

Abstract

This study decomposes major price indices in Pakistan into permanent and transitory components using the Beveridge and Nelson (1981) methodology. The results show that most of the peice variations are permanent with a mojor portion being deterministic. The transitory variations in the consumer price index are only slightly greater than those in the wholesale price index. Therefore, rent-seeking activities at the retail level are limited. Although a similar pattern holds for the open market versus official exchange rates, rent seeking can be prevalent because the market is thin and operates on a spot basis. The study concludes that a forecasting strategy based on the Beveridge-Nelson approach removes the bulk of uncertainty from peicesm though risk cannot be avoided.

Suggested Citation

  • Eatzaz AHMAD & Sheena Naz ALI, 1999. "PERMANENT AND TEMPORARY PRICE VARIATIONS: A Decomposition Analysis based on Stochastic Forecasting Models," Pakistan Journal of Applied Economics, Applied Economics Research Centre, vol. 15, pages 55-72.
    • Handle: RePEc:pje:journl:article1999iii
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    Cited by:

    1. Sadia Tahir, 2003. "Core Inflation Measures for Pakistan," SBP Working Paper Series 04, State Bank of Pakistan, Research Department.

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