Department of Economics. University of Melbourne. Parkville Victoria
3052 Australia
ABSTRACT
Unit root and stationarity test suggest that shocks to quarterly US,
Japanese and UK inflation are infinitely persistent. Recently developed
test based on threshold autoregressions are used to distinguish between
non-stationarity and non-linearity. The evidence suggests that inflation
is well described as a two-regime covariance stationary threshold process.
Shocks to inflation are highly persistent in one regime, but have finite
lives in the other regime. A small-scale Monte-Carlo experiment is used
to document the finite sample performance of commonly used unit root and
stationarity tests in the face of a neglected threshold effect.
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