Nonlinearity and Inflation Rate Differential Persistence: Evidence from the Eurozone.

We employ a linear unit root test as well as a nonlinear two-regime Threshold Autoregressive (TAR) unit root test to determine whether inflation differentials in the Eurozone during the period 1970-2009 were persistent or transitory. The results imply that inflation rate differentials in the Eurozone are characterized by threshold nonlinearity. After modeling the nonlinear characteristics of the series with the appropriate unit root test, our test's results reveal that inflation rate differentials in the Eurozone are mainly persistent. Our findings imply that the higher the increase of the inflation rate differential, the more persistent the inflation rate differential is likely to be.