Inflation Shocks: Quantile Unit Root Inference for Panel Data with Cross-Correlations

Abstract

The growing empirical literature documents evidence on persistence of shocks to inflation; however, little is known about the nature of inflation shocks with asymmetric persistence and cross-correlations. By introducing panel quantile unit root approach with common shocks for a sample of 75 countries from January-1980 to December-2022, this study provides new insights on the persistence of inflation shocks. The panel quantile unit root analysis sheds light on that (i) inflation appears to exhibit significant cross-correlations across countries at all quantiles, and persistence of inflation shocks shifts notably between low and high quantiles, reflecting asymmetric persistence in inflation dynamics, (ii) inflation rates tend to be mean reverting during low to moderate inflation periods, but more persistent in high inflation period, (iii) inflation becomes persistent at higher thresholds in countries with a history of inflationary episodes. These findings reveal the importance of considering asymmetric persistence and cross-correlations for analyzing inflation shocks.