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Oxford Economic Papers Advance Access originally published online on December 10, 2004
Oxford Economic Papers 2005 57(1):51-69; doi:10.1093/oep/gpi004
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Right arrow E31 - Price Level; Inflation; Deflation
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© Oxford University Press 2004; All rights reserved

Non-linear inflationary dynamics: evidence from the UK

Michael Arghyrou*, Christopher Martin{dagger}, and Costas Milas{ddagger}

*Brunel Business School, Brunel University {dagger}Department of Economics and Finance, Brunel University, Uxbridge, Middlesex UB8 3PH; e-mail: christopher.martin{at}brunel.ac.uk {ddagger}Department of Economics, City University, London

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.

Key Words: JEL classification: C51 • C52 • E31


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C. Milas
Does high M4 money growth trigger large increases in UK inflation? Evidence from a regime-switching model
Oxf. Econ. Pap., April 14, 2008; (2008) gpn013v1.
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