Non-linear inflationary dynamics: evidence from the UK

M Arghyrou, Christopher Martin, C Milas

Research output: Contribution to journalArticle

15 Citations (Scopus)

Abstract

This paper estimates a variety of models of inflation using quarterly data for the UK between 1965 and 2001. We find that the persistence of inflation is nonlinear since inflation adjusts more rapidly when prices are further from the steady state and when prices are above the steady state. We find that models that assume a uniform speed of adjustment are unreliable in periods of macroeconomic stress, when inflation adjusts more rapidly. Our findings suggest a need for a more sophisticated analysis of optimal monetary policy that allows for variations in the persistence of inflation and highlight the dangers of policymakers not using the best available model of inflation.
Original languageEnglish
Pages (from-to)51-69
Number of pages19
JournalOxford Economic Papers
Volume57
Issue number1
DOIs
Publication statusPublished - 2004

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