ARE PRICES STICKY IN MONTENEGRO? EVIDENCE FROM RECENT ECONOMETRIC TECHNIQUES
Keywords:
Inflation stickiness, Structural breaks, RALS, MontenegroAbstract
Inflation stickiness is defined as the tendency of shocks to the general level of prices to destabilise the inflation rate for a period of time. Inflation stickiness can occur in various ways. Considering that inflation is related to expectations, it can be said that inflation in the current period is a function of past inflation. In this context, there is an autoregressive process. If the realised inflation rate in the past period is high, the inflation expectation for the current period is high and this situation reduces the disinflationary effects of the economic policies implemented. Another mechanism that causes stickiness is realised through exchange rate fluctuations. When exchange rates increase, import prices increase and inflation tends to rise. The aim of this study is to investigate whether there is inflation stickiness in the Montenegrin economy. The data of the study are monthly inflation rates in Montenegro. The data were obtained from https://www.fxempire.com/macro/montenegro/inflation-rate database. The data range covers the period between April 2015 and March 2025. Unit root tests were applied as a method in the study. While the presence of a unit root is considered as evidence of inflation stickiness, the stationarity result indicates that there is no inflation stickiness. According to the results of the conventional ADF unit root test, the series is unit rooted. It was observed that the model residuals of the ADF unit root test did not exhibit a normal distribution and the RALS-ADF unit root test, which takes into account the non-normal distribution of the residuals, was applied. The unit root result was obtained from the RALS-ADF test. However, both ADF and RALS-ADF unit root tests do not take into account structural breaks and may produce biased results towards the acceptance of the null hypothesis of unit root. In this context, the LM unit root test, which takes into account two structural breaks in the level and slope, was applied and it was found that the series exhibited a trend stationary structure with two structural breaks. However, since the model residuals do not conform to the normal distribution, the RALS-LM unit root test, which takes into account the non-normal distribution of the residuals, was also applied. The RALS-LM test also yielded trend stationary results under two structural breaks. In this framework, it is concluded that there is no inflation stickiness for the Montenegrin economy in the period analysed if structural breaks are taken into account.
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