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BOB NOBAY IVAN PAYA DAVID A. PEEL Inflation Dynamics in the U.S.: Global but Not Local Mean Reversion 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 emp iri cal res ult s confirm a number of the ke y fea tures suc h as global sta tio n- arity, local unit root behavior, and lower persistence in the post-1983 period tha n in the pre -19 83 per iod. We compar e the for eca sti ng abi lit y of our mod el 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. JEL codes: C15, C22, E31 Keywor ds: unit root, inflation persistence, nonlinear EST AR. A STYLIZED FACT of the dynamics of U.S. inflation, as first highlighted in the pioneering contribution of Nelson and Schwert (1977), clearly indicates that it is a very persistent process. In fact, many studies suggest that U.S. in- flat ion cont ai ns a unit root (s ee, e.g ., Barsky 1987, Br unner and Hess 1993). Moreover, the unit root property appears to be shared for a wide array of economies examined in O’Reilly and Whelan (2005) and Cecchetti et al. (2007). More recently, in influ- ential contributions, Stock and Watson (2007) and Cogley and Sargent (2007) have 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. BOB NOBAY is at the London School of Economics ( E-mail: [email protected]). IVAN PAYA is at the Lancaster University Management School ( E-mail: i.paya@lancaster .ac.uk). DAVID A. PEEL is at the Lancaster University Management School ( E-mail: d.peel@lancaster . ac.uk). Received August 7, 2008; and accepted in revised form August 28, 2009. Journal of Money , Credit and Banking, Vol. 42, No. 1 (February 2010) C 2010 The Ohio State University

Nobay, Paya & Peel ( ) Inflation Dynamics in US_Global but Not Local Mean Reversion

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