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Non-linear inflationary dynamics: evidence from the UK

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Michael Arghyrou
Christopher Martin
Costas Milas

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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. Copyright 2005, Oxford University Press.

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File URL: http://hdl.handle.net/10.1093/oep/gpi004
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Publisher Info
Article provided by Oxford University Press in its journal Oxford Economic Papers.

Volume (Year): 57 (2005)
Issue (Month): 1 (January)
Pages: 51-69
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Handle: RePEc:oup:oxecpp:v:57:y:2005:i:1:p:51-69

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  1. Costas Milas, 2007. "Does high M4 money growth trigger large increases in UK inflation? Evidence from a regime-switching model," Keele Economics Research Papers KERP 2007/07, Centre for Economic Research, Keele University. [Downloadable!]
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  2. D R Osborn & M Sensier, 2004. "Modelling UK Inflation: Persistence, Seasonality and Monetary Policy," Centre for Growth and Business Cycle Research Discussion Paper Series 46, Economics, The Univeristy of Manchester. [Downloadable!]
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