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Arrow-Calvo Price Staggering

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  • PETER MCADAM
  • ALPO WILLMAN

Abstract

We merge Arrow and Calvo pricing themes leading to a price-resetting signal dependent on inflation and competitiveness. This allows us to tractably analyse state-dependent issues and to develop a New Keynesian Phillips curve (NKPC) expressed for the levels of variables and a specification which is not regime dependent. The standard NKPC arises as a special case. Using non-linear simulation and estimation techniques, we then demonstrate the importance of regime dependence in inflation dynamics and show that standard NKPCs are mis-specified even in low-inflation regimes. We further detect strong intrinsic persistence in historical US inflation. Copyright � 2010 The Authors. The Manchester School � 2010 Blackwell Publishing Ltd and The University of Manchester.

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Bibliographic Info

Article provided by University of Manchester in its journal The Manchester School.

Volume (Year): 78 (2010)
Issue (Month): 6 (December)
Pages: 556-581

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Handle: RePEc:bla:manchs:v:78:y:2010:i:6:p:556-581

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  17. N. Gregory Mankiw & Ricardo Reis, 2001. "Sticky information versus sticky prices: a proposal to replace the New-Keynesian Phillips curve," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.
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  19. Paul Levine & Peter McAdam & Joseph Pearlman, 2007. "Inflation-Forecast-Based Rules and Indeterminacy: A Puzzle and a Resolution," International Journal of Central Banking, International Journal of Central Banking, vol. 3(4), pages 77-110, December.
  20. Rudebusch, Glenn D., 2000. "Assessing nominal income rules for monetary policy with model and data uncertainty," Working Paper Series 0014, European Central Bank.
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