Inflation Dynamics and Inflation Regimes

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Inflation Dynamics and Inflation Regimes

Author Info

David Demery
Nigel Duck ()

Abstract

In this paper we develop and estimate a new-Keynesian model of inflation and use it to investigate the hypothesis that prices in the UK are re-set more frequently during periods of high inflation. In the model, firms are assumed to condition their expectations on an optimally-selected but incomplete information set and we further assume that the probability that they will reset their price in any quarter depends upon the prevailing inflationary regime. The model implies more complex inflation dynamics than conventional new-Keynesian models predict. We find that we cannot reject the formal restrictions implied by the model (using UK quarterly data) and we estimate that the mean time before prices were reset was around eight months during the 'high' inflationary regime and approximately two years when mean inflation was 'low'.

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Paper provided by Department of Economics, University of Bristol, UK in its series Bristol Economics Discussion Papers with number 03/549.

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Length: 25 pages
Date of creation: Feb 2003
Date of revision:
Handle: RePEc:bri:uobdis:03/549

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Find related papers by JEL classification:
E21 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

This paper has been announced in the following NEP Reports:

NEP-MAC-2003-09-24 (Macroeconomics)
NEP-MON-2003-09-24 (Monetary Economics)

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