Sticky Prices and Volatile Output: Or When is a Phillips Curve not a Phillips Curve
AbstractWe examine the effect of introducing price stickiness into a stochastic growth model subject to a cash in advance constraint. As has been previously documented, the introduction of price rigidities provides a substantial source of monetary non-neutrality; leads to a strong positive correlation between inflation and output; and contributes significantly to output volatility. We find, however, that this increased volatility arises mostly at the higher than business cycle frequencies; leads to lower persistence in output fluctuations; and causes a deterioration in the ability of the model to explain UK data at all frequencies, but especially over the business cycle. As noted by Chari, Kehoe and McGratten (1996) this failure of exogenous price stickiness to cause persistent output fluctuations is due to strongly pro-cyclical marginal costs. Our results clearly show that, in the context of our model, adding price rigidities is not sufficient to account for business cycle fluctuations.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 1849.
Date of creation: Mar 1998
Date of revision:
Contact details of provider:
Postal: Centre for Economic Policy Research, 77 Bastwick Street, London EC1V 3PZ.
Phone: 44 - 20 - 7183 8801
Fax: 44 - 20 - 7183 8820
Other versions of this item:
- M Ellison & Andrew Scott, 1998. "Sticky Prices and Volatile Output: or when is a Phillips Curve not a Phillips Curve?," CEP Discussion Papers dp0396, Centre for Economic Performance, LSE.
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
You can help add them by filling out this form.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.