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A1436
Title: Local unit root and inflationary inertia in Brazil Authors:  Wagner Gaglianone - Central Bank of Brazil (Brazil)
Osmani Guillen - Ibmec and BCB (Brazil) [presenting]
Abstract: The purpose is to study the persistence of Brazilian inflation using quantile regression techniques. To characterize the inflation dynamics we employ a Quantile Autoregression model. In this model, the autoregressive coefficient may assume different values, allowing testing the asymmetry hypothesis for the inflation dynamics. Furthermore, the model allows investigating the existence of a local unit root behavior. In other words, the model enables to identify locally unsustainable dynamics, but still compatible with global stationarity. In addition, the model can be reformulated in a more conventional coefficient notation, in order to reveal the periods of local nonstationarity. Another advantage of this technique is the estimation method, which does not require knowledge of the innovation process distribution, making the approach robust against poorly specified models. An empirical exercise with Brazilian inflation data and its components illustrates the methodology. As expected, the behavior of inflation dynamics is not uniform across different conditional quantiles. In particular, the results can be summarized as follows: (i) the dynamics is stationary for most quantiles of the sample period; (ii) the process is nonstationary in the upper tail of the conditional distribution; and (iii) the periods associated with local unsustainable dynamics can be related to those of increased risk aversion and higher inflation expectations.