Intrinsic inflation persistence
AbstractEmpirical evidence suggests that inflation determination is not purely forward-looking, but models of price setting have struggled to rationalize this finding without directly assuming backward-looking pricing rules for firms. This paper shows that intrinsic inflation persistence can be explained with no deviation from optimizing, forward-looking behaviour if prices that have remained fixed for longer are more likely to be changed than those set recently. A relationship between the probability of price adjustment and the duration of a price spell is shown to imply a simple "hybrid" Phillips curve including lagged and expected inflation, which is estimated using macroeconomic data.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Monetary Economics.
Volume (Year): 57 (2010)
Issue (Month): 8 (November)
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Web page: http://www.elsevier.com/locate/inca/505566
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- E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
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