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Intrinsic and Inherited Inflation Persistence

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Author Info
Jeffrey C. Fuhrer

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Abstract

In the conventional view of inflation, the New Keynesian Phillips curve (NKPC) captures most of the persistence in inflation. The sources of persistence are twofold. First, the "driving process" for inflation is quite persistent, and the NKPC implies that inflation must "inherit" this persistence. Second, backward-looking or indexing behavior imparts some "intrinsic" persistence to inflation. This paper shows that, in practice, inflation in the NKPC inherits very little of the persistence of the driving process, and it is intrinsic persistence that constitutes the dominant source of persistence. The reasons are that, first, the coefficient on the driving process is small, and, second, the shock that disturbs the NKPC is large.

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Publisher Info
Article provided by International Journal of Central Banking in its journal International Journal of Central Banking.

Volume (Year): 2 (2006)
Issue (Month): 3 (September)
Pages:
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Handle: RePEc:ijc:ijcjou:y:2006:q:3:a:2

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Find related papers by JEL classification:
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. N. Gregory Mankiw & Ricardo Reis, 2002. "Sticky Information Versus Sticky Prices: A Proposal To Replace The New Keynesian Phillips Curve," The Quarterly Journal of Economics, MIT Press, vol. 117(4), pages 1295-1328, November. [Downloadable!] (restricted)
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  2. Erceg, Christopher J. & Henderson, Dale W. & Levin, Andrew T., 2000. "Optimal monetary policy with staggered wage and price contracts," Journal of Monetary Economics, Elsevier, vol. 46(2), pages 281-313, October. [Downloadable!] (restricted)
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  3. John B. Taylor, 1980. "Aggregate Dynamics and Staggered Contracts," NBER Reprints 0126, National Bureau of Economic Research, Inc.
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  4. Rudd, Jeremy & Whelan, Karl, 2005. "New tests of the new-Keynesian Phillips curve," Journal of Monetary Economics, Elsevier, vol. 52(6), pages 1167-1181, September. [Downloadable!] (restricted)
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  5. Andrew Levin & Jeremy Piger, 2003. "Is Inflation Persistence Intrinsic in Industrial Economies?," Computing in Economics and Finance 2003 298, Society for Computational Economics.
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  6. Gali, Jordi & Gertler, Mark & Lopez-Salido, J. David, 2001. "European inflation dynamics," European Economic Review, Elsevier, vol. 45(7), pages 1237-1270. [Downloadable!] (restricted)
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  7. Peter N. Ireland, 2004. "Technology Shocks in the New Keynesian Model," NBER Working Papers 10309, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  8. Timothy Cogley & Argia M. Sbordone, 2005. "A search for a structural Phillips curve," Staff Reports 203, Federal Reserve Bank of New York. [Downloadable!]
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  9. Sbordone, A.M., 1998. "Prices and Unit Labor Costs: a New Test of Price Stickiness," Papers 653, Stockholm - International Economic Studies.
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  10. Fuhrer, Jeff & Moore, George, 1995. "Inflation Persistence," The Quarterly Journal of Economics, MIT Press, vol. 110(1), pages 127-59, February. [Downloadable!] (restricted)
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  11. Fuhrer, Jeffrey C. & Rudebusch, Glenn D., 2004. "Estimating the Euler equation for output," Journal of Monetary Economics, Elsevier, vol. 51(6), pages 1133-1153, September. [Downloadable!] (restricted)
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  12. Marvin Goodfriend & Robert G. King, 1998. "The new neoclassical synthesis and the role of monetary policy," Working Paper 98-05, Federal Reserve Bank of Richmond. [Downloadable!]
  13. Gerard O'Reilly & Karl Whelan, 2004. "Has euro-area inflation persistence changed over time?," Working Paper Series 335, European Central Bank. [Downloadable!]
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  14. Fuhrer, Jeffrey C, 1997. "The (Un)Importance of Forward-Looking Behavior in Price Specifications," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(3), pages 338-50, August.
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  15. Ball, Laurence & Gregory Mankiw, N. & Reis, Ricardo, 2005. "Monetary policy for inattentive economies," Journal of Monetary Economics, Elsevier, vol. 52(4), pages 703-725, May. [Downloadable!] (restricted)
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  16. Gray, Jo Anna, 1978. "On Indexation and Contract Length," Journal of Political Economy, University of Chicago Press, vol. 86(1), pages 1-18, February. [Downloadable!] (restricted)
  17. Fischer, Stanley, 1977. "Long-Term Contracts, Rational Expectations, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, vol. 85(1), pages 191-205, February. [Downloadable!] (restricted)
  18. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September. [Downloadable!] (restricted)
  19. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 2001. "Nominal rigidities and the dynamic effects of a shock to monetary policy," Working Paper 0107, Federal Reserve Bank of Cleveland. [Downloadable!]
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  20. Roberts, John M, 1995. "New Keynesian Economics and the Phillips Curve," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 975-84, November. [Downloadable!] (restricted)
  21. Anderson, Gary & Moore, George, 1985. "A linear algebraic procedure for solving linear perfect foresight models," Economics Letters, Elsevier, vol. 17(3), pages 247-252. [Downloadable!] (restricted)
  22. Gali, Jordi & Gertler, Mark, 1999. "Inflation dynamics: A structural econometric analysis," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 195-222, October. [Downloadable!] (restricted)
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  23. Bai, Jushan, 1999. "Likelihood ratio tests for multiple structural changes," Journal of Econometrics, Elsevier, vol. 91(2), pages 299-323, August. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Adam Hale Shapiro, 2006. "Estimating the New Keynesian Phillips Curve: a vertical production chain approach," Working Papers 06-11, Federal Reserve Bank of Boston. [Downloadable!]
    Other versions:
  2. Michael T. Kiley, 2006. "A quantitative comparison of sticky-price and sticky-information models of price setting," Finance and Economics Discussion Series 2006-45, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
    Other versions:
  3. Oleg Korenok & Stanislav Radchenko & Norman R. Swanson, 2006. "International Evidence on the Efficacy of new-Keynesian Models of Inflation Persistence," Working Papers 0602, VCU School of Business, Department of Economics. [Downloadable!]
    Other versions:
  4. Ashoka Mody & Franziska Ohnsorge, 2007. "Can Domestic Policies Influence Inflation?," IMF Working Papers 07/257, International Monetary Fund. [Downloadable!]
  5. Chengsi Zhang & Denise R. Osborn & Dong Heon Kim, 2006. "The New Keynesian Phillips Curve: from Sticky Inflation to Sticky Prices," Centre for Growth and Business Cycle Research Discussion Paper Series 78, Economics, The Univeristy of Manchester. [Downloadable!]
    Other versions:
  6. Roger Bjørnstad and Ragnar Nymoen, 2006. "Will it float? The New Keynesian Phillips curve tested on OECD panel data," Discussion Papers 463, Research Department of Statistics Norway. [Downloadable!]
  7. Efrem Castelnuovo, 2006. "Monetary Policy Switch, the Taylor Curve, and the Great Moderation," Computing in Economics and Finance 2006 59, Society for Computational Economics. [Downloadable!]
  8. Fabià Gumbau-Brisa, 2005. "Heterogeneous beliefs and inflation dynamics: a general equilibrium approach," Working Papers 05-16, Federal Reserve Bank of Boston. [Downloadable!]
  9. Andreas Hornstein, 2007. "Evolving inflation dynamics and the New Keynesian Phillips Curve," Economic Quarterly, Federal Reserve Bank of Richmond, issue Fall, pages 317-339. [Downloadable!]
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