INFLATION CONVERGENCE IN FRAGILE FIVE COUNTRIES: EVIDENCE FROM RALS-LM UNIT ROOT TESTS

Abstract

The aim of this study is to investigate whether or not inflation convergence exists in the Fragile Five countries that are Brazil, Indonesia, South Africa, India, and Turkey. We collect monthly consumer price indices of the Fragile Five countries for the period 1995:1-2023:12. The inflation rate differential of each country is obtained in order to test the existence of inflation convergence. We employ the traditional LM and RALS-LM unit root tests that consider the structural breaks. After determining that the residuals of the regressions used in the traditional LM unit root tests do not fit the assumption of normal distribution, so we consider the results of the RALS-LM unit root tests. According to the empirical results, it is found that only India and Turkey are convergent. Therefore, it can be stated that inflation convergence in the Fragile Five countries is weak. The presence of weak inflation convergence in the Fragile Five countries indicates that a common monetary policy cannot be designed for these countries and also a common monetary union cannot be constituted.