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Nonlinearity of the inflation-output trade-off and time-varying price rigidity

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  • Antonia López-Villavicencio
  • Valérie Mignon

Abstract

Relying on the backward-looking Phillips curve; we estimate the level of inflation that erodes price rigidity and investigate its time constancy. To this end; we employ smooth transition regression models with rolling regressions to account for varying threshold inflation levels. Studying six advanced countries over the 1970-2012 period; our results show that both the slope of the Phillips curve and the threshold; trend inflation that erodes price rigidity are time varying. These characteristics could not be captured by a static linear or nonlinear model; illustrating the rich flexibility embedded in our proposed model.

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Bibliographic Info

Paper provided by CEPII research center in its series Working Papers with number 2013-02.

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Date of creation: Jan 2013
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Handle: RePEc:cii:cepidt:2013-02

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Keywords: Phillips curve; inflation; price rigidity; nonlinearity; menu costs;

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