Are inflation rates in OECD countries actually stationary during 2011-2018? Evidence based on Fourier Nonlinear Unit root tests with Break

We re-investigate the hypothesis of inflation stationarity in 33 Organization of Economic Cooperation and Development (OECD) member countries from 2011 to 2018. We compare two linear fractional-based, two nonlinear Fourier-based and two nonlinear Fourier-Fractional-based unit root tests with five classical unit root tests. Classical unit root tests are biased to the hypothesis of unit root since they do not account for structural breaks and nonlinearities. Incorporating just the Fourier framework into the ADF test does not significantly improve the conventional ADF unit root test. More importantly, we find that accounting for the observed limitations of the classical unit root tests improves the power of test. The rejection ability of the examined unit root tests are greatly enhanced whenever inherent salient features (nonlinearity and fractional integration) are combined with structural breaks. The battery of enhanced unit root tests confirmed the Norwegian inflation rate as the only nonstationary series among the thirty three considered. More than half of the OECD member countries have inflation rates that are somewhat stationary within the investigated period. Robustness check indicated the superiority of test regression with Fourier nonlinearity and break over the classical ADF regression.