Pricing Policies and Inflation Inertia
AbstractThe paper proposes a monetary model with nominal rigidities that differs from the conventional New Keynesian model in that firms set pricing policies instead of price levels. In response to permanent or highly persistent monetary policy shocks this model generates the empirically observed slow (inertial) and prolonged (persistent) reaction of the inflation rate, and also the recession which typically accompanies moderate disinflations. The reason is that firms respond to such shocks mostly through achange in the long-run or inflation updating component of their pricing policies. With staggered pricing policies this takes time to be reflected in aggregate inflation.
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Bibliographic InfoPaper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 232.
Date of creation: Oct 2003
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Other versions of this item:
- NEP-ALL-2003-11-03 (All new papers)
- NEP-MFD-2003-11-03 (Microfinance)
- NEP-MON-2003-11-03 (Monetary Economics)
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- Kolver Hernandez, 2006.
"State-Dependent Nominal Rigidities & Disinflation Programs in Small Open Economies,"
06-13, University of Delaware, Department of Economics.
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- Le, Vo Phuong Mai & Minford, Patrick, 2007.
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Cardiff Economics Working Papers
E2007/7, Cardiff University, Cardiff Business School, Economics Section.
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- Jaromir Benes & Tibor Hledik & Michael Kumhof & David Vavra, 2005. "An Economy in Transition and DSGE: What the Czech National Bankâ€™s New Projection Model Needs," Working Papers 2005/12, Czech National Bank, Research Department.
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