Does a Threshold Inflation Rate Exist? Quantile Inferences for Inflation and Its Variability

63 Pages Posted: 27 Aug 2008 Last revised: 26 Dec 2010

See all articles by Wen-Shwo Fang

Wen-Shwo Fang

Feng Chia University - Department of Economics

Stephen M. Miller

University of Nevada, Las Vegas - Department of Economics; University of Connecticut - Department of Economics

Chih-Chuan Yeh

Overseas Chinese University - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: November 18, 2009

Abstract

Using quantile regressions and cross-sectional data from 152 countries, we examine the relationship between inflation and its variability. We consider two measures of inflation – the mean and median – and three different measures of inflation variability – the standard deviation, relative variation, and median deviation. All results from the mean and standard deviation, the mean and relative variation, or the median and the median deviation support both the hypothesis that higher inflation creates more inflation variability and that inflation variability raises inflation across quantiles. Moreover, higher quantiles in both cases lead to larger marginal effects of inflation (inflation variability) on inflation variability (inflation). We particularly consider whether thresholds for inflation rate or inflation variability exist before finding such positive correlations. We find evidence of thresholds for the effect of inflation (inflation variability) on inflation variability (inflation). That is, for low inflation (inflation variability) countries, inflation (inflation variability) does not affect inflation variability (inflation). Finally, a series of robustness checks, including a set of additional explanatory variables as well as controlling for potential endogeneity with instrumental variables, leaves our findings generally unchanged.

Keywords: inflation, inflation variability, inflation targeting, threshold effects, quantile regression

JEL Classification: C21, E31

Suggested Citation

Fang, Wen-Shwo and Miller, Stephen M. and Yeh, Chih-Chuan, Does a Threshold Inflation Rate Exist? Quantile Inferences for Inflation and Its Variability (November 18, 2009). Empirical Economics, December 2010, Available at SSRN: https://ssrn.com/abstract=1234903 or http://dx.doi.org/10.2139/ssrn.1234903

Wen-Shwo Fang

Feng Chia University - Department of Economics ( email )

100, WenHwa Rd
Talchung
Taiwan

Stephen M. Miller (Contact Author)

University of Nevada, Las Vegas - Department of Economics ( email )

4505 S. Maryland Parkway
Box 456005
Las Vegas, NV 89154
United States
702-895-3776 (Phone)
702-895-1354 (Fax)

HOME PAGE: http://faculty.unlv.edu/smiller/

University of Connecticut - Department of Economics

365 Fairfield Way, U-1063
Storrs, CT 06269-1063
United States

Chih-Chuan Yeh

Overseas Chinese University - Department of Finance ( email )

Taichung
Taiwan

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