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Unit Roots in Inflation and Aggregation Bias

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  • Joseph Byrne
  • Alexandros Kontonikas
  • Alberto Montagnoli

Abstract

In this paper, we examine whether UK inflation is characterized by aggregation bias using three sets of increasingly disaggregated inflation data and a battery of univariate and panel unit root tests. Our results support the existence of aggregation bias since while the unit root hypothesis cannot be rejected for aggregate inflation, it can be rejected for some of its sectoral components, with the rejection frequencies increasing when we use more disaggregate data. Results from structural break analysis indicate that monetary policy shifts are the main factor behind breaks in UK inflation. The panel results typically indicate that when sectoral inflation rates are pooled the unit root hypothesis can be rejected. Our results have important implications for applied econometric analysis, macroeconomic theory and for the conduct of monetary policy.

Suggested Citation

  • Joseph Byrne & Alexandros Kontonikas & Alberto Montagnoli, 2007. "Unit Roots in Inflation and Aggregation Bias," Working Papers 2007_07, Business School - Economics, University of Glasgow.
    • Handle: RePEc:gla:glaewp:2007_07
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    File URL: http://www.gla.ac.uk/media/media_219099_en.pdf
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    References listed on IDEAS

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    Cited by:

    1. Joseph P. Byrne & Alexandros Kontonikas & Alberto Montagnoli, 2010. "The Time‐Series Properties Of Uk Inflation: Evidence From Aggregate And Disaggregate Data," Scottish Journal of Political Economy, Scottish Economic Society, vol. 57(1), pages 33-47, February.
    2. Skorbiansky, Sharon Raszap & Saavoss, Monica & Camp, Kevin M., 2022. "The Economics of Plant-Based Milk," 2022 Annual Meeting, July 31-August 2, Anaheim, California 322496, Agricultural and Applied Economics Association.

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    More about this item

    Keywords

    Inflation; Unit Root; Disaggregation; Structural Breaks; Panel Data;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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