Abstract
This note examines the degree of persistence of UK inflation by applying fractional integration methods to historical data spanning the period 1210–2016; the chosen approach is more general than the popular ARMA models based on the classical I(0) vs. I(1) dichotomy. The full‐sample results do not suggest that UK inflation is a persistent process; however, the recursive analysis indicates an increase in the degree of persistence in the 16th century and more recently after WWI and in the last quarter of the 20th century. On the whole, monetary and exchange rate regime changes do not appear to have had a significant impact on the stochastic behaviour of inflation if one takes a long‐run, historical perspective.
Highlights
Inflation persistence is an important issue for both academics and central banks
A notable exception is a recent contribution by Caporale et al (2018), who use long-memory methods based on fractional integration to measure persistence of UK inflation over the period 1660–2016 and find that it has been relatively stable since the end of WWI despite the adoption of different monetary regimes
The approach used is preferable to the standard ARMA framework based on the classical dichotomy between the I(0) non-stationary and I(1) stationary cases, since it allows the differencing parameter to take fractional values and captures a much wider range of stochastic behaviours
Summary
Inflation persistence is an important issue for both academics and central banks The former is interested in understanding whether or not it can be deemed to be structural in the sense of Lucas (1976); for instance, Benati (2008) estimates AR models for a long span of UK data (from 1718 to 2006) to compare the relevance of reduced form and structural New-Keynesian models, respectively, and finds that the evidence does not support a structural interpretation of persistence. The present note follows on from that paper; it uses fractional integration techniques, but it extends the analysis by measuring persistence over a much longer sample going back to 1210; in addition, it applies recursive methods to capture the possibly gradual evolution of persistence over time. Data and Empirical Results The series examined is annual headline CPI inflation; the source is the Bank of England’s historical macroeconomic dataset (“a millennium of macroeconomic data,” version 3.1); the sample period goes from 1210 to 2016
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