Inflation problem of Hongkong - Essay Example

?Running Head: INFLATION PROBLEM OF HONG-KONG INFLATION PROBLEM OF HONG-KONG By Chapter Four ADF Testing the Co-integration The Augmented Dickey-Fuller (ADF) is used to determine the properties of serial correlation, through the application of the auto-regressive approximation in testing their unit roots (Hansen, 1990, p. 16). Take for example, Where, ut is the Cochrane-Orcutt Residuals. p is a constant parameter. The idea here borrowed from Hansen’s work, which indicates that “the null of no co-integration” test uses the formula below, and possibly explains the asymptomatic nature of the distribution of the prices (Hansen, 1990, p. 17). In the global market, testing the Co-integration involves the co-variance stationery processes, including the autoregressive moving average (ARMA) process (Hansen, 1990, p. 17). Indeed, the analysis is fundamental in reforming the trade policies of a country. The issue that the process considers is the competitive nature of the pricing behavior. Notably, the prices keep on changing as a result of the demands and the supply of particular items in the market (Leung, Chow & Chan, 2008, p.177). Certainly, the decrease in the supply of a sensitive item in the market, such as stationary, would automatically generate an increase in demand, consequently, raising the unit cost of the item. The standard models for determining spatial price provide the market integration predictions, suggesting that the price transmission matches the commodity equilibrium prices, whether they are sold in local or foreign market (Hansen, 1990, p. 8). The exchange in foreign market would only create the different in the cost of currency transfer, depending on the value of the currency. In essence, the model outlines that the demand and supply changes have various impacts in trade. Therefore, it is important to consider the prices of commodities in the foreign markets, to ensure that the co-integration fits the business, since the market dynamics determines such prices (Leung, Chow & Chan, 2008, p.177). In cases where the market integration is absence, it implicates the economic welfare of the country. Therefore, the country has to address the problem urgently, to avoid facing the partial price transmission that might cause deficit in the balance of payment (Hansen, 1990, p. 16). The failures, which are imminent for not co-integrating the business operations results from inadequate information to the business players. It is necessary for the country a better communication and transport infrastructure, to ease the dissemination of business information, and transport the final products to the market respectively (Hansen, 1990, p. 18). This would ensure the success of the business. Testing Framework for Price Transmission Price transmission encompasses the relationships of the market dynamics, integration that arise from the trade discontinuities and policies governing trade operations and the pressure that the dominant players exert in the market (Hansen, 1990, p. 17). In testing the price transmission components, the following techniques are used; causality, co-integration, symmetry, and error correction mechanisms (Hansen, 1990, p. 18). Notably, each technique provides an insight on the specific price transmission component. Co-integration In markets that are spatially separated, one notes that the chain of supply differs from one geographic region to the other. p1t & p2t follow similar order in integration. Therefore, the prices of goods are co-integrated when, p1t – b p2t = ut (3) is I (0) (Hansen, 1990, p. 19). Where, b is co-integrating vector or (scalar when there are two variables). (3) is co-integration regression. Notably, in linear combination, without the stochastic trend, the p1t & p2t values are said to be integrated, implying that in future, the commodity prices would be closely together. Precisely, this explains the market integration concept, where, the prices that are drifted apart are subsequently drawn together, as a result as some forces within the market. As well, the stretch of prizes can be called the price elasticity transmission. Notably, co-integration is a theory, meaning that it does not have the structural models, as the parameters that help in its calculation (Leung, Chow & Chan, 2008, p.178). The business community believes that, with time, the cost of different commodities will merge to form almost equal prices (Hansen, 1990, p. 20). If the prices do not merge and continues to drift a part, then the null of non co-integration is rejected (Hansen, 1990, p. 21). Therefore, it means that the non-proportional stochastic trends drive the process of integration. Under such cases, there are commodity price changes that are evidenced at the international level. In addition, the marginal cost deviations and the trade policies may also have an effect in the overall pricing strategy, thereby, creating an impact on the market price and limiting the market integration (Hansen, 1990, p. 21). The major disadvantage of using co-integration for market integration testing is the stationery nature of the transfer cost and its implication in the in the process of integration. Notably, it is only the transfer costs that are non stationery would suggest market integration, because of signal transmission within markets at domestic or, international level (Hansen, 1990, p. 22). Nonetheless, the reality is that the two markets move independently in terms of pricing. Therefore, the implication is that, the producers are not adequately informed making the test difficult to rely on, for the right signal of price change. Apparently, this keeps them in the dark side of economic development, barring their effective involvement in steering the improvements of the economy. For example, let us presume that there is a time series Xt which is the integrated of order one, in such a way that its differences are also stationary in the country of operation. It is stated by the Wolds Theorem that in every co variance-stationary processes, including the autoregressive moving average (ARMA) process, can be represented as an infinite MA process of its innovation process (Hansen, 1990, p. 22). The differences for Xt can therefore be expressed as ?xt = ?j=0 cj €t-j Where; Series Cj is hummable, such that 8j = 0, Cj = 8 The equation 1 is multivariate setting, where xt is a (kx1) vector and C (L) is a matrix, polynomial of the form C (L) = Co+C1L+C2L2+………… with its first term equal to (k x k) identity matrix such that C (0) = Ik, yields (Hansen, 1990, p. 22) xt = (1-L) xt = C (L)t Impacts of Price Transmission and Food Policies In separate markets, the price variations make their relationship dissimilar, due to the difference in the transport cost (Hansen, 1990, p. 22). For example, the price variation from marker A to market B can be calculated as follows, pAt = pBt + c1 Where, pAt is the price in market A pBt is the price in market B c1 is the transport cost Let us take the commodity price in market A is $500, in market B is $420 and the transport cost is $200, the relationship would be, pAt = pBt + c1 = 420 + 200 = 620 =$600 pBt = pAt – c1 = 500 – 200 = 300 =$300 c1 = pAt - pBt = 600 -300 =300 $300 When using aspects of the multivariate, for example, Beverage-Nelson decomposition, most studies employ matrix polynomial given as (Hansen, 1990, p. 23). C (L) = C (1) + (1-L) C x (L) Where C* (L) is a matrix in the lag operator with A x j = 8k = j + 1 Ak The equation 2 can then be written by Vector moving average (VMA); Xt = C (1)t + (1-L) C x ( L)t Now if we suppose that if the value of the vector such that a C (1) = 0, canceling the difference operator on both sides, the equation 4 will be (Hansen, 1990, p. 23) axt = aC * (L)t The right hand side shows the vector moving average process that is always taken as stationary. Following the concept of Engle and Granger (1987), we can then define co-integration formally in these terms (Hansen, 1990, p. 24). The components of the vector xt are said to be co-integrated of order d, b, denoted by xt CI (d, b) if (i) all components are I(d); there exists a vector a=0, so that zt = axt ~ I (d-b), b>0. This vector is called as co-integration vector by terms of the Engle and Grange. Chapter Five Error Correction Model Perhaps, the Error-Correction Method (ECM) is the best technique that can be used in comparing two prices in different markets (Hansen, 1990, p. 19). It encompasses interest rates, prices of goods and the exchange rate conditions. Indeed, the model shows that the price transmission of different commodities change gradually, bearing in mind that there are various discontinuities that the business people encounter in making the transactions (Hansen, 1990, p. 19). In essence, the discontinuities inhibit the smooth operation in trade, thus, slows the market integration. When the error-correction coefficient moves between -0.01 to about -0.07, then it helps the researcher in determining the policy issues, transactional cost, and other related issues affecting the integration (Leung, Chow & Chan, 2008, p.179). Therefore, he/she could advise the stakeholders on the best practices, to ensure that the integration is accomplished. The other important thing to note is that, hardly can the researcher rely on co-integration to infer on the causes of variables, without performing the causality tests. Indeed, it is the tests that reveals the truth regarding the variations of the barriers to effective co-integration, and provide a solution on the best ways of intervention and ensuring that the market integration is achieved. Furthermore, in integrating the pAt1 & pBt2 for two separate markets, Where, pAt1 is the price in market A and pBt2 is the price in market B, the Vector Error Correction is represented as bellow (Hansen, 1990, p. 19). (4) Where, Dp1t & Dp2t are the parameters used in estimating ECM. & are the disturbances p1t & p2t are the variables. b is co-integration parameter. A2...Ak are used in estimating the effects of integration in the short run. Often, the equillibrium is hardly maintained and in most cases, the extremes of the inflation are evidenced in the market (Hansen, 1990, p. 20). In reality, the market mostly experience either or low or high supply of commodities, making the commodity prices to increase or reduce respectively. Notably, the price adjustments shape the nature of the co-integration, and its relationship with the equilibrium. Having this knowledge, usually enables research on the ways of harmonising the two prices to achieve the equilibrium status. Furthermore, business people agree that at equilibrium, all the participants in the business transaction have adequate satisfaction standards (Hansen, 1990, p. 21). Notably, the information contained, shows the transmission mechanisms and adjustments, indicating that the correctional parameters have to be considered in adjusting to the price transmission in the market. As well, the sensitivity of commodity price transmission makes its consideration worth in preparing for the adjustment in the prices of different commodities in the market, especially during inflation. Moreover, when the economy of the country is adjusting to the pressure and shocks of the business transactions, during inflation, the precaution should be exercised for the country not to let the adjustments ruin the economy (Leung, Chow & Chan, 2008, p.181). In addition, the adjustments to be made depend entirely on the structure of the general equilibrium, lets, the country plunge into economic crisis. For example, a decrease in the demand for money results from a higher price level. The model also allows the researcher to compare the effects of various disequilibria, especially when dealing with a variety of markets. In essence, the differences in the market give a variety of the prices of goods, making the disequilibria to adjust depending on the market rate and regional location of the market (Hansen, 1990, p. 23). Notably, the reasons accounting for such changes range from the country’s policies, to the market forces exerted from the international business players. Whether fast or slow, the market disequilibria adjust according to the cost of goods in the market (Johnson & Wichern, 2007, p.39). Notably, the rate of inflation has some inertia in its dynamics and demands for money. A careful study of the changes shows that, the commodity prices are not sticky, since the latter would not indicate any variation. Apparently, the cumulated impacts of inflation affect the economic performance of the country in the present structure and the future progress. This puts the economy in a unique status and possible in a crisis, involving the microeconomic indicators such as currency-deposit that keeps on shifting on demand, and could lead to the collapse of the economy (Hansen, 1990, p. 24). In fact, such situation might lead to the creation of pyramid schemes, whose activities could swindle the cash from the unsuspecting citizens. The activities of such pyramid schemes interfere with the financial exchange rate, raising the inflation. As well, a combination of other factors, including policies, business operation environment threatened the economy of the country. In such cases, an increase in the demand for currency, safe business environment and restoration of revenue collection, might correct the inflation (Hansen, 1990, p. 24). One notice that the countries strive to correct the impacts of inflation to save the ordinary citizens from the harshness of living during inflation, when meeting the family livelihood is hardly achieved. Considering the effects of inflation, the government of Hong Kong embarked on reviewing the economic policy involving finance and the business environment. In fact, this was an attempt to strengthen the financial position of the country, and ensure that the social and economic situation improves. This was a sure way of giving hope to the economy that faced crisis. The turn that the economy takes, once it has been redeemed from imminent collapse, depends on the commitment of the policy makers, business environment and the contribution of the large corporations operating in the region. Indeed, the coordinated efforts among the players could work to eliminate the rate of inflation and bring the country back to track. In testing the hypothesis of the relationship between the price levels and exchange rates, as inflation determinants, the error-correction model is compared to the co-integration and their relationships and the market demands for the currency (Leung, Chow & Chan, 2008, p.195). If the co-integrated relationships are fairly stationery, then it shows that the rate of inflation is minimal and will stabilise within a short period. However, if the relationships varied, then the inflation is threatening and consequential actions are necessary. The status of the county’s economic performance is pegged on the overall of the parameters, which are used in establishing the economic performance. Indeed, every country would strive to strengthen the economic performance indicators, including the exchange rates, policy frameworks, business operation environment and the impacts of the large multi-national corporations that operate in the country (Hansen, 1990, p. 24). As well, the country should correct the deficits in their balance of payment, to ensure that they minimize the losses that might arise from the shortage. The anticipated inflation elasticity has to be treated seriously and the solution sought in drawing the conclusion on the economic changes, which the country should effect. For example, in Hong Kong, the low income earners are experiencing a lot of pressure resulting from the inflation. The cost of living is growing higher and higher despite their low pay. This means that, they are not able to afford some of the basic needs due to exorbitant prices of commodities. The government can only assist this group of people through administrative policies, giving priority to their needs. Currently, in 1990, the finance secretary outlined that the inflation was stagnant at around two percent, indicating that the fluctuation in the cost of living was not on the extremes (Hansen, 1990, p. 24). At the same time, the economy of the country was stably growing at the rate of 6.5 percent, signifying that most of the low income group could be hardly hit by the changing commodity prices (Economic Report, 2011, p. 1). The effect of inflation is significant since; it increases the prices sharply, thus locking a number of people from enjoying the utilities of the goods. Other than the consumers, the business community is also affected because the sales turnover is greatly reduced. Indeed, the people shy from purchasing other commodities, which are stocked as well. Let us take a typical scenario of inflation in Hong Kong in 1990 (Rich & Steindel, 2005, p.44). An increase of prices from $10 to $13, or more, would mean that, the consumer has to cough an extra expenditure of almost $3 per unit cost of the goods (Johnson & Wichern, 2007, p.57). Therefore, for one household consuming about fifty units of the same item in one week, the buyer will spend about $150 more than the normal expenditure. Literally, this will infringe the expenses on other important items, leading to priority change or limiting the expenditure per unit of the same item, or in a range of items. This lowers the consumption rate and leading to a shift in the pattern of consumption of goods, from one basic commodity to another. As a result, it changes the financial flow by increasing the household expenditure and a corresponding reduction in sales due to reduced quantity of purchases. The small enterprises are the worst affected, since their income base is still not stabilized. In another shift in pushing the self-interest, the owners of real estate take the advantage to increase the cost of real estate, making such lucrative modern apartments a dream for the low income people. In essence, the houses do not only become expensive, but, literally unaffordable to the majority of the population (Hansen, 1990, p. 25). This indicates that when the country projects inflation, the authority has to take urgent measures to address the anticipated cause of inflation, in order to minimize its effects. The challenge that comes with inflation is that most governments do not have the modalities of controlling the impacts of inflation. Measures, such as devaluing the currency only worsen the situation as it addresses the problem within a short period, only for the country to realize later that it cannot meet the balance of payment in the financial statements (Rich & Steindel, 2005, p.99). The low exchange rate of the currency does not solve the engrossed trade problems that the country might face in transacting business across the international boarders. In addition, the reduced purchasing power following the devaluation of the currency would indicate that the large quantities of food imports that the country normally rely on would reduce, causing shortage in the recipient country. Besides, the country would have to freeze some expenditure, to enable it import the basic goods that the citizens need most urgently, meaning that they have to forgo other expenditure to balance the country’s needs, in terms of priority (Hansen, 1990, p. 26). In some cases, inflation results to the shortage of consumer goods forcing the outlets to minimize the units that each buyer is allowed to purchase. Notably, the technique is to distribute the access to the commodity that in short supply. For example, when the supply of sugar is low, the consumers may be restricted to a given quantity per shopping in the market, to ensure that others are not locked out from obtaining some quantity for the domestic use. The country experience the shortage might be forced to increase the import of the commodity to balance the domestic need. Furthermore, there should be policies to increase the wage earning per individual, to increase their purchasing power. However, the employers also find it challenging to increase the individual wage during inflation, since their income is as well affected. Indeed, it is during inflation that most companies make heavy losses, making it difficult to implement any salary increase for the workers (Hansen, 1990, p. 25). Instead, they retrench the redundant workers, to cut on the company expenditure. Inflation is therefore hard to deal with, and in most cases, emerging companies close during this period, because, they cannot meet the cost of operation. The government should work on policies to shield the small business from the full force of inflation from the large corporations, whose activities might lead to the closure of the small businesses. In Hong Kong, for example, inflation made the government to pledge food storage facilities to subsidize the existing ones, and put relief measures for food as top priorities to counter the food shortage in the country (Rich & Steindel, 2005, p.121). Without focusing on the food shortage and the ways of mitigating it, then, the government risk exposing the citizens to starvation, lowering the dignity of the people. The food reserves would ensure that the government is able to meet the local needs in case of emergency. Therefore, it becomes the obligation of the policy makers to guarantee the country of food safety as a measure to reduce the consequences of inflation (Hansen, 1990, p. 27). Formulating the mitigation measures when there is the actual inflation do not help a country, but, worsen the situation. This is because; the short term measures that the authority will apply in mitigating the effects of inflation, might not be helpful in the future. Therefore, the country has to prepare adequately for the price fluctuations, whether anticipated or not. Ti shows the strength of the country in fighting to safeguard its citizens from the harsh economic conditions, which might lower the productivity of the individuals. As well, the state guarantees its people economic prosperity, because; the process of production would not experience a drawback from the consequences of inflation (Economic Report, 2011, p. 1). In many countries, the government fights inflation through boosting the reserves for food. Often, the governments spend billions of resources in purchasing the required amount of food for the population. In essence, this is a temporary way of mitigating the anticipated inflation, and applied in most countries. The method is cheap in the short time frame, but, later becomes an expensive undertaking for the government (Leung, Chow & Chan, 2008, p.197). Obviously, the governments normally rely on the temporary means of fighting inflation, hoping that the business players and development partners would seek for the permanent solution to the crisis that the country faces as a result of inflation. Indeed, the economic difficulties that follow inflation call for serious actions to avoid the accumulation of effects that the population risks. Therefore, it is through determination that the government, in conjunction with the stakeholders in the country may work to eliminate the continued suffering of the civilians during inflation, and once the normality resumes (Hansen, 1990, p. 30). Chapter Six Testing the Unit Root In estimating the variance of the commodity prices within the market, the unit root test is considered as the appropriate means of ascertaining the variation in the market (Hansen, 1990, p. 24). Consider the table below: Table 1 Levels Differences With Drift With drift and trend ICO Composite Indicator Price ADF test -1.192 -1.135 -9.220 Phillips Perron Test Zt -1.015 -0.938 -9.226 Phillips Perron Test Zr -2.886 -2.620 -107.151 Producer Price , Ethiopia ADF test -2.036 -2.146 -12.455 Phillips Perron Test Zt -2.033 -2.149 -12.455 Phillips Perron Test Zr -10.352 -10.971 -149.882 Producer price, Rwanda ADF test -10.910 -1.690 -13.377 Phillips Perron test Zt -1.092 -1.702 -13.766 Phillips Perron test Zr -3.472 -7.016 -159.370 Producer price, Uganda ADF test -2.027 -1.395 -10.595 Phillips Perron test Zt -2.049 -1.425 -10.595 Phillips Perron test Zr -6.167 -4.783 -126.494 Source: http://www.ssc.wisc.edu/~bHansen, 1990, p./papers/CochraneOrcutt.pdf The information can be presented in a pie Chart as follows; Figure 1 Explanation From the graphs, it is clear that there are differences in the markets of all the countries examined. In addition, the ADF test is more reliable in testing the unit roots. Therefore, inflation is imminent and explains the differences between the variables used in calculating the co-integration of the market prices for commodities. The figure also shows that, both the trend and the drift in the market have a lot of influence in the inflation pattern and might make the integration successful or unsuccessful. Data Analysis The Phillips Perron Test indicates that the long run consequences of price variations would shape the direction of inflation, either to increase in the prices of the goods, or reduction in the prices of the goods. Indeed, the results may be expected or can be subjective to the condition of the business environment, in terms of the government policy and the behaviour of the consumers. The other things that influence the trend are the market forces, resulting from the pressure of the multinational corporations and the consumer preference for certain goods, either because of their low cost of durable nature. Inflation is notably, higher when the market extremes are reached, thus, the forces within the market interplays to stabilize the prices of goods no matter the supply (Hansen, 1990, p. 25). Indeed, inflation is normally occurring in free market, noting that the movements of goods and their prizes are controlled by the market situation, than the policies. Under such market, the government actually exercises limited control of the prices, a situation not suitable for the emerging businesses in the market. The dominant companies take advantage of their huge capital and warehousing capability to have stock Suppression in the supply of the most important goods in the market should attract the attention of the policy makers, who in turn put in place measures to the goods are made available for the consumers (Johnson & Wichern, 2007, p.97). Truly, the steady commodity practice would ensure that the supply and demand curves do not fluctuate to the extent of resulting to the crisis of inflation. Sometimes, increase in the prices of sensitive goods, used on daily basis, could result to a permanent rise and the cost might not likely to reduce soon. Therefore, it means that the rate at which the economy grows also determines the extent of inflation that the country is likely to experience. The seasonal inflation is as a result of the nature of governmental policies aimed at solving a particular problem within the country or region, and do affect the unit cost of goods within a time frame, but, the normal operation resumes afterwards (Hansen, 1990, p. 25). They are called the short run inflation that the market force normally corrects itself, without the need for government intervention (Hansen, 1990, p. 25). In ceases where the inflation is expected to rise in future, the market should adjust to minimise the effects of the inflation (Hansen, 1990, p. 26). For example, the producers should be encouraged to make alternative goods that would supplement the ones expected to be in short supply. Secondly, the business community could be encouraged to import the goods, from areas of surplus production, to balance the deficit that is anticipated to cause inflation (Hansen, 1990, p. 26). Indeed, those are practical measures that the state would implement, to ensure that the does not experience a hitch. In times of slow rate of inflation, it is very difficult to reverse the laws governing the remuneration of labour, and their cost remains relatively low. In addition, if not carefully monitored, the situation threatens to spill after the inflation is over. Thus, the low wages are likely to be implemented after the operation has been normalized. When the situation is thought to operate under the normal business condition, the rate of inflation is reduced, but, the operation unit cost of the labour remains stagnant (Johnson & Wichern, 2007, p.127). Notably, such situation does not contribute to the national and regional economic development, because, the exploited group of people will depend on others, to meet the cost of their living. During inflation, most of the problems that the people face need the formulation of a workable policy statement, that correct the perceived problem and not to aggregate the situation (Hansen, 1990, p. 29). However, the policy makers in the country are reluctant to implement certain policies that are aimed at empowering the common people, thus, enhancing the economic level of the individual. The fear that the policy makers have is the fact that, making adjustment to the existing legal frameworks would worsen the situation. Therefore, they do not take the anticipated active role in ensuring that the working condition favours the majority if not all. Conclusion In summary, inflation raises the cost of living per household, thus should be eliminated at all cost. The various parameters of inflation include price fluctuation, increase or decrease in the exchange rates currency, fluctuations in the demands and supply of essential good, trade policies that the different countries implement, as well as the contributions of the major players in business at the International level. The approach that the state implements to correct inflation depend on the anticipated nature of the price reduction or surge. Apparently, there is little to be done, since most of the inflation that countries experience is never anticipated, or result from the multinational organizations whose activities are hardly controlled in other regions. In fact, there is no relationship between the expected and actual rate of inflation that the country experiences, since the movement of prices are never constant, but depends on the availability of the goods and the willingness of the consumers to drive the satisfaction from the goods. In this case, when the consumers are able to purchase the goods, and the supply is fairly constant, there would mot be alarm of damaging fluctuation; instead, the difference would be minimal that the consumers would not feel the effect on their expenditure. The Hong Kong situation is no difference. They have experienced worse moments during inflation, and the seasonal adjustments in the period. In their effort to mitigate the impacts of the inflation, the stakeholders involvement proved fruitful, thus the giant business corporations were involved. The wages that were used in paying the labour explained the nature of the inflation, as a flexible variable that changes with the condition and the geographical location. When the labour cost is compared with the output, the researcher knows whether the productivity commensurate whatever they are given in terms of the reward. In fact, that is a major indicator of inflation in a country. There are places where the labour is exploited even in the absence of inflation. In such places, the situation becomes poorer during inflation because, it would worsen the cost of labour per unit production. Notably, the category of the labour that is mostly exploited during the period is the less educated, since most of them are employed under informal contract, therefore the employers take advantage not to reward the labor according to the required standards. Finally, the government of Hong Kong is doing a lot to reduce the impacts of inflation in the whole country. Some of the measures include stakeholders’ involvement, creation of strategic reserves, increasing import of sensitive commodities during inflation and formulating better policy practices, aimed at reviving the consumption behaviour of the citizens through education. For effective mitigation of the anticipated inflation, the citizens also have a prominent to play. Firstly, individual reserve is necessary in ensuring that the household is self-sufficient. Secondly, the household has to change the consumption habit in preparation for the hard times ahead. Reference Economic Report (2011). Development of Exchange-Trade Funds (EFTs) in Hong Kong. Available at: [Accessed on 18 October, 2011]. Hansen, Bruce. (1990). A Powerful, Simple Test for Co-integration using Cochrane-Orcutt. New York. Retrieved from Johnson, R. & Wichern, D. (2007). Applied Multivariate Statistical Analysis. New York: Prentice Hall. Leung, F., Chow, K. & Chan, S. (2008). Measures of Trend inflation in Hong Kong. BIS Papers, Number 49: 177-200. Rich, R. & Steindel, C. (2005). A Review of Core Inflation and an Evaluation of its Measures. New York, NY: Staff Reports 236. Appendixes Appendix i ADF Testing the Co-integration In calculating the Cochrane –Orcutt Residual, the applicable formula is; Where, ut is the Cochrane-Orcutt Residuals. p is a constant parameter. ADF is calculated using the formula; Appendix ii Table 1: A table Showing market Variation in Commodity Prices. Levels Differences With Drift With drift and trend ICO Composite Indicator Price ADF test -1.192 -1.135 -9.220 Phillips Perron Test Zt -1.015 -0.938 -9.226 Phillips Perron Test Zr -2.886 -2.620 -107.151 Producer Price , Ethiopia ADF test -2.036 -2.146 -12.455 Phillips Perron Test Zt -2.033 -2.149 -12.455 Phillips Perron Test Zr -10.352 -10.971 -149.882 Producer price, Rwanda ADF test -10.910 -1.690 -13.377 Phillips Perron test Zt -1.092 -1.702 -13.766 Phillips Perron test Zr -3.472 -7.016 -159.370 Producer price, Uganda ADF test -2.027 -1.395 -10.595 Phillips Perron test Zt -2.049 -1.425 -10.595 Phillips Perron test Zr -6.167 -4.783 -126.494 Appendix iii Figure 1 Appendix iv Data Analysis The Phillips Perron Test indicates that the long run consequences of price variations would shape the direction of inflation, either to increase in the prices of the goods, or reduction in the prices of the goods. Indeed, the results may be expected or can be subjective to the condition of the business environment, in terms of the government policy and the behaviour of the consumers. The other things that influence the trend are the market forces, resulting from the pressure of the multinational corporations and the consumer preference for certain goods, either because of their low cost of durable nature. Inflation is notably, higher when the market extremes are reached, thus, the forces within the market interplays to stabilize the prices of goods no matter the supply (Hansen, 1990, p. 25). Indeed, inflation is normally occurring in free market, noting that the movements of goods and their prizes are controlled by the market situation, than the policies. Under such market, the government actually exercises limited control of the prices, a situation not suitable for the emerging businesses in the market. The dominant companies take advantage of their huge capital and warehousing capability to have stock Read More