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New Keynesian Explanations of Cyclical Movements in Aggregate Inflation and Regional Inflation Differentials

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Author Info

  • Matthew Canzoneri

    ()

  • Robert Cumby

    ()

  • Behzad Diba

    ()

  • Olena Mykhaylova

    ()

Abstract

What determines the cyclical behavior of aggregate inflation and regional inflation differentials? The answer has strong implications for monetary policy and in Europe for the Stability and Growth Pact. In the United States, inflation rates move pro-cyclically, and across the Euro Area, inflation differentials are positively correlated with growth differentials. This suggests that demand shocks are the primary determinants of the cyclical behavior of aggregate inflation and regional inflation differentials. In this paper, we discuss New Keynesian explanations of these correlations, and we argue that demand shocks are either missing or inadequately modeled in the in typical New Keynesian model. Copyright Springer Science + Business Media, Inc. 2006

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Bibliographic Info

Article provided by Springer in its journal Open Economies Review.

Volume (Year): 17 (2006)
Issue (Month): 1 (January)
Pages: 27-55

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Handle: RePEc:kap:openec:v:17:y:2006:i:1:p:27-55

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Web page: http://www.springerlink.com/link.asp?id=100323

Related research

Keywords: inflation; inflation differentials; NNS models;

References

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  8. Margarida Duarte, 2003. "The euro and inflation divergence in Europe," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 53-70.
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  12. Christopher J. Erceg & Luca Guerrieri & Christopher Gust, 2006. "SIGMA: a new open economy model for policy analysis," International Finance Discussion Papers 835, Board of Governors of the Federal Reserve System (U.S.).
  13. Peter N. Ireland, 2004. "Technology Shocks in the New Keynesian Model," The Review of Economics and Statistics, MIT Press, vol. 86(4), pages 923-936, November.
  14. Angeloni, Ignazio & Ehrmann, Michael, 2004. "Euro area inflation differentials," Working Paper Series 0388, European Central Bank.
  15. 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.
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  17. Reis, Ricardo, 2006. "Inattentive consumers," Journal of Monetary Economics, Elsevier, vol. 53(8), pages 1761-1800, November.
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Citations

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Cited by:
  1. Tatiana Kirsanova & Simon Wren-Lewis, 2007. "Optimal Fiscal Feedback on Debt in an Economy with Nominal Rigidities," Discussion Papers 0705, Exeter University, Department of Economics.
  2. Matthew Canzoneri, 2007. "Coordination of Monetary and Fiscal Policy in a Monetary Union: Policy Issues & Analytical Models," Money Macro and Finance (MMF) Research Group Conference 2006 165, Money Macro and Finance Research Group.
  3. Joseph P. Byrne & Norbert Fiess, 2007. "Euro Area Inflation: Aggregation Bias and Convergence," Working Papers 2007_41, Business School - Economics, University of Glasgow.
  4. Yamin Ahmad & Ming Chien Lo & Olena Mykhaylova, 2012. "Causes of Nonlinearities in low order models of the real exchange rate," Working Papers 12-01, UW-Whitewater, Department of Economics, revised Mar 2013.
  5. Giannellis, Nikolaos, 2013. "Asymmetric behavior of inflation differentials in the euro area: Evidence from a threshold unit root test," Research in Economics, Elsevier, vol. 67(2), pages 133-144.
  6. Mykhaylova, Olena, 2009. "Welfare implications of country size in a monetary union," MPRA Paper 23323, University Library of Munich, Germany.

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