Nonlinearity In Inflation, A Case of Pakistan

Recent research work has shown that inflation rate is asymmetric and it is also well known that asymmetry is a non-linear phenomenon. In order to better understand this non-linearity in inflation of Pakistan, we investigate the possible presence of Smooth Transition Autoregressive (STAR) non-linearity in inflation series. The study finds that month on month inflation series for Pakistan possesses both logistic and exponential STAR type non-linearity. Exponential Smooth transition function was proven to be more relevant on the basis of Dijk et al. (2000). Therefore, we develop ESTAR model in this paper which outperforms its linear rivals in forecasting.