Non-Linear Inflationary Dynamics: Evidence from the UK

Posted: 29 Feb 2008

Date Written: January 2005

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.

JEL Classification: C51; C52; E31

Suggested Citation

Arghyrou, Michael, Non-Linear Inflationary Dynamics: Evidence from the UK (January 2005). Oxford Economic Papers, Vol. 57, Issue 1, pp. 51-69, 2005. Available at SSRN: https://ssrn.com/abstract=916818

Michael Arghyrou (Contact Author)

University of Piraeus ( email )

Karaoli & Dimitriou 80
Piraeus, 18534
Greece
19 (Fax)

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