The authors are grateful for valuable feedback to the editor and two anonymous referees, from participants at the 2008 European Monetary Forum, seminar participants at Lancaster, and Alicante. Ivan Paya is also grateful for financial support from the Spanish Ministerio de Educacion y Ciencia Research Project ECO2008-05721/ECON.
Inflation Dynamics in the U.S.: Global but Not Local Mean Reversion
Version of Record online: 28 DEC 2009
© 2010 The Ohio State University
Journal of Money, Credit and Banking
Volume 42, Issue 1, pages 135–150, February 2010
How to Cite
NOBAY, B., PAYA, I. and PEEL, D. A. (2010), Inflation Dynamics in the U.S.: Global but Not Local Mean Reversion. Journal of Money, Credit and Banking, 42: 135–150. doi: 10.1111/j.1538-4616.2009.00281.x
- Issue online: 28 DEC 2009
- Version of Record online: 28 DEC 2009
- Received August 7, 2008; and accepted in revised form August 28, 2009.
- unit root;
- inflation persistence;
- nonlinear ESTAR
A stylized fact of U.S. inflation dynamics is one of extreme persistence and possible unit root behavior. If so, the implications for macroeconomics and monetary policy are somewhat unpalatable. Our econometric analysis proposes a parsimonious univariate representation of the inflation process for the last 60 years, the nonlinear exponential smooth autoregressive. The empirical results confirm a number of the key features such as global stationarity, local unit root behavior, and lower persistence in the post-1983 period than in the pre-1983 period. We compare the forecasting ability of our model with that of competing univariate models and find that the nonlinear model outperforms the linear autoregressive model in the pre-1983 period and the random walk in the post-1983 period at short horizons.