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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 University of Paris West - Nanterre la Défense, EconomiX in its series EconomiX Working Papers with number 2013-1.

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Length: 17 pages
Date of creation: 2013
Date of revision:
Handle: RePEc:drm:wpaper:2013-1

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

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  1. Terasvirta, T & Anderson, H M, 1992. "Characterizing Nonlinearities in Business Cycles Using Smooth Transition Autoregressive Models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 7(S), pages S119-36, Suppl. De.
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  15. Pedro Pablo Alvarez Lois, 2000. "Asymmetries In The Capacity-Inflation Trade-Off," UFAE and IAE Working Papers 470.00, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
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