Analysis of Inflation Persistence in Serbia

Abstract

In this paper, we analyzed inflation persistence in Serbia, both at the aggregate level as well as for the different components of the consumer price index. The analysis was done for the series of prices given on the quarterly basis for the period from 2002q1 to 2013q2. We applied univariate autoregression model (AR) of order p, whereby sum of autoregression coefficients was used as a measure of inflation persistence. In addition, special attention was paid to the problem of structural breaks in the series of inflation as it may overestimate the level of inflation persistence and could give misleading signals. The importance of appropriate assessment of the inflation persistence stems from the fact that the impossibility of faster return of inflation to the long-run equilibrium level, after external or domestic shock, has implications on the conducting of monetary policy and represents a major challenge for its effectiveness, especially in emerging countries like Serbia. If the persistence of inflation is higher, monetary policy reaction should be stronger and proactive. If the estimated level and persistence of inflation is lower in comparison with previous empirical analysis, this could suggest that inflation expectations are now better anchored, which is particularly important for countries with inflation targeting regime. Results of the analysis indicate that the inflation persistence in the Serbia is modest and that is higher at the aggregate level compared to the simple average of the components of the consumer price index. This is probably consequence of so-called aggregation effect, since the highest persistency have the prices of those products with the largest share in the consumer basket. In the case of Serbia, food prices have the highest degree of persistence and the largest share in the consumer basket.