This paper estimates a variety of models of inflation using quarterly data for the UK
between 1965 and 2001. We find strong evidence that the persistence of inflation is
nonlinear and that inflation adjusted more rapidly in periods of macroeconomic stress
such as the mid-1970s, the early 1980s and the late 1980s-early 1990s. Our results
imply that inflation will respond more strongly and more rapidly to changes in interest
rates when the price level is further away from the steady state level. This has
implications for optimal monetary policy
