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Can the New Keynesian Phillips Curve Explain Inflation Gap Persistence?

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  • Fang Yao
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Abstract

Whelan (2007) found that the generalized Calvo-sticky-price model fails to replicate a typical feature of the empirical reduced-form Phillips curve - the positive dependence of inflation on its own lags. In this paper, I show that it is the 4-period-Taylor-contract hazard function he chose that gives rise to this result. In contrast, an empirically-based aggregate price reset hazard function can generate simulated data that are consistent with inflation gap persistence found in US CPI data. I conclude that a non-constant price reset hazard plays a crucial role for generating realistic inflation dynamics.

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Bibliographic Info

Paper provided by Sonderforschungsbereich 649, Humboldt University, Berlin, Germany in its series SFB 649 Discussion Papers with number SFB649DP2010-030.

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Length: 25 pages
Date of creation: Jun 2010
Date of revision:
Handle: RePEc:hum:wpaper:sfb649dp2010-030

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Keywords: Inflation gap persistence; Trend inflation; New Keynesian Phillips curve; Hazard function;

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