Inflation persistence in Luxembourg a comparison with EU15 countries at the disaggregate level

The aim of this paper is to analyse the degree of inflation persistence in Luxembourg using disaggregate price index data from the Harmonised Index of Consumer Prices. The degree of inflation persistence is then compared to estimates for the EU15 and for the euro area as well as for the individual member countries according to a unified approach. In order to assess the robustness of our estimates both a parametric and a non-parametric measure of inflation persistence is used. Overall, our results suggest a relatively low degree of inflation persistence in Luxembourg. For a large number of sub-indices we are not only able to reject the unit root hypothesis, but also we find a low degree of inflation persistence relative to other EU15 countries and relative to the EU15 and euro area aggregates. For Luxembourg as well as the other EU15 countries, our results suggest substantial heterogeneity in the degree of inflation persistence across sub-indices. We find some support for the presence of aggregation effects,    both across indices and countries. Structural break tests for all EU15 countries suggest the presence of structural changes in the inflation process owing to the inception of the single monetary policy and/or to the modified treatment of sales.

Keywords: Inflation persistence, Mean reversion, Aggregation effect, Structural breaks

JEL Codes: E31, C21, C22, C14