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Adjustment Cost-Driven Inflation Inertia

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  • Sebastian Sienknecht

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    (Department of Economics, Friedrich-Schiller-University Jena)

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    Abstract

    This paper shows how endogeneous inflation inertia is generated by a simple modificaton of the quadratic adjustment cost structure faced by economic agents. We derive the pertinent inflation relationships based on purely nominal rigidities and show that they always involve additional expectation terms which are absent in a Calvo-type environment. However, the structural differences do not prevent dynamic adjustment paths and theoretical moments to be similar under both rigidity assumptions. An extensive application of nominal adjustment frictions leads to a full-scale macroeconomic framework able to replicate empirical responses to an interest rate shock.

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    File URL: http://www.wiwi.uni-jena.de/Papers/jerp2010/wp_2010_023.pdf
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    Bibliographic Info

    Paper provided by Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics in its series Jena Economic Research Papers with number 2010-023.

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    Date of creation: 26 Mar 2010
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    Handle: RePEc:jrp:jrpwrp:2010-023

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    Keywords: Inflation Dynamics; New Keynesian Phillips Curve; Business Fluctuations;

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