Abstract
Food prices are excluded from core measures of inflation in many countries assuming food prices are transitory.Exclusion of food prices may lead to information loss, leading to higher inflationary expectations, a downwardbias to forecasts of future inflation and lags in policy responses. Assumption that log food price series behave byway of I(1) and differenced log food price series linger in the manner of I(0) process leads to modelmisspecification. Correct identification of the memory in the food price series is vital for the correct modelspecification and is important for policy makers. This study aims to examine whether food price inflation istransitory in Sri Lanka by estimating the memory properties of food price series using non-parametric,semi-parametric and parametric tests. The study covers the period from January, 2003 to December, 2013.Results show that food price inflation, nonfood price inflation and headline inflation, and global food priceinflation series are fractionally integrated. Food price series in Sri Lanka commoves with global food prices.Research findings show that food price inflation is not transitory, long memory series. The outcomes of thisattempt have consequential implications towards food policy, trade policy and monetary policy makers. Thesefindings suggest that neglecting food prices may render the core inflation measure a biased measure of long runinflation.
Highlights
In today’s globalized world, food price dynamics have a noticeable influence on the world’s economic and political stableness as well as on the wellbeing of every single country
A battery of nonparametric, semi-parametric and parametric tests was used to investigate long memory of food price series. All these tests show that food price series have long memory and they are fractionally integrated
Results suggest that food price series are not transitory in nature and have significant permanent components which imply strong evidence of persistence in food inflation in Sri Lanka
Summary
In today’s globalized world, food price dynamics have a noticeable influence on the world’s economic and political stableness as well as on the wellbeing of every single country. High and increasing food prices pose a significant policy challenge to macroeconomic stability in developing countries where the food expenditure share in household expenditure is relatively high (Mishra & Roy, 2012). Extreme volatility and increasing trend of food prices has energized the necessity of perceiving the behavior and the characteristics of food prices. According to Deaton (1999), a better understanding of commodity prices is necessary to construct good policy. Oil price has more volatility which determine food price. Global food price volatility appears to have increased in recent years
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