Inflation Persistence and Price Dynamics in Macedonia: Theory and Empirical Analysis

We apply classical econometric method to characterize the dynamic behavior of the quarter-on-quarter inflation over the period 1997q1-2010q1. In particular, we estimate univariate autoregressive (AR) models for the aggregate consumer price inflation series and as well as for the consumer price inflation at representative product groups level, taking into account the influence of structural breaks in the mean of inflation on the level of persistence. We find strong evidence for a break in the mean for the housing, transport and communication services and culture and leisure inflation. Allowing for a break in the mean of inflation, the inflation measures generally exhibit relatively lower inflation persistence. We also analyze price dynamics in Macedonia at representative products level over the same period.