Inflation and Structural Change in 50 Developing Countries‪.‬

Introduction During the last 20 years, beginning with the seminal work of Nelson and Plosser [1982], which found evidence that most U.S. macroeconomic time series have a unit root (a stochastic trend), the question of whether the inflation rate can be thought of as exhibiting a degree of stochastic nonstationarity has received some attention in the literature. A number of studies by eminent scholars using data for industrialized economies, in particular the United States and the United Kingdom, have shown that the inflation rate can be treated as a nonstationary variable in empirical applications [Baba et al., 1988; King et al., 1991; Johansen, 1992, Ericsson and Irons, 1994; Evans and Lewis, 1995; Crowder and Hoffman, 1996; Ericsson et al., 1998; Crowder and Wohar, 1999; Hendry, 2000; Ng and Perron, 2001; Rapach, 2002]. As Johansen [1992] put it, "some time series such as the log of prices (P), have the property that even the inflation rate [DELTA]P is nonstationary, whereas the second difference [[DELTA].sup.2]P is stationary." This characterization of the inflation rate implies that shocks to inflation have a permanent effect because of the presence of a unit root. (1)