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Hump-shaped Behavior of Inflation and Dynamic Externality

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Author Info
Takayuki Tsuruga

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Abstract

This paper develops a model which can explain the hump-shaped impulse response of inflation to a monetary shock. A standard New Keynesian (NK) model is augmented so as to include dynamic externality with sticky wages and variable capital utilization. In our analysis, we assume purely forward-looking nominal rigidities in nominal prices and wages a la Calvo(1983). Nevertheless, we can show that inflation is hump-shaped under a reasonable range of parameters. It will be also shown that, in order for inflation to be hump-shaped, sticky wages and variable capital utilization are important as well as dynamic externalities.

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Paper provided by Econometric Society in its series Econometric Society 2004 Far Eastern Meetings with number 614.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:feam04:614

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Related research
Keywords: Inflation New Keynesian Phillips curve Sticky-price model Sticky wages Variable capital utilization Dynamic Externality

Find related papers by JEL classification:
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
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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