The dependence between Cape-Verdean and Portuguese inflations: A copula approach

Abstract

Cape Verde is a country where the production structure is weak, which makes it heavily dependent on imports of goods and commodities especially food and fuel represent two thirds of the national needs. This study aims to determine the degree of dependence between Cape Verdean and Portuguese inflation. Copula methodology will be adopted by not making any assumptions about the distribution of variables, and by being able to capture the presence of non-linear association between the variables and also know the format of this relationship. This paper estimates a series of parametric copulas in order to find out which of them can best represent the dependency relationship between the variables in question. Made use of measures of dependence Spearman's Rho and Kendall’s Tau and the results indicate that inflation in Cape Verde has a very weak dependence relationship with the Portugal inflation.