Structural Breaks and the Dynamic Effects of Inflation and Growth Rates on Monetary Aggregates

The paper addresses the problem of determining the order of levels of inflation integration and growth rates on monetary aggregates as a result of multiple structural breaks on the dynamics of these economic variables.

In discussing the existent approaches to unit root testing on structural breaks, the author proposes a modified approach where, in the first stage, the structural break points are determined endogenously via the impulse-indicator saturation (IIS) technique with the matching break points then used exogenously in the appropriate Dickey-Fuller (ADF) unit root test. This approach allows for unit root testing for any number of structural breaks. An application of this proposed approach to analysing Belarusian data from 1995 to 2009 leads the author to conclude that the rates of inflation, both on the basis of the GDP deflator measure and consumer price index (CPI), as well as the growth rates of monetary aggregates M0, M1, M2 and M3, are stationary variables with a changing mean. Consequently, these variables have a I(0) order of integration. The paper also finds that the confirmed dates of structural breaks correspond to regime changes in the dynamics of the examined variables and have a clear economic interpretation. The results presented in the paper are therefore useful for the econometric modelling of future inflation and monetary policy.