Are Shocks to Inflation Infinitely Persistent?.

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.