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Abstract

It is commonly asserted that inflation is a jump variable in the New Keynesian Phillips curve, and thus wage-price inertia does not imply inflation inertia. We show that this "inflation flexibility proposition" is highly misleading, relying on the assumption that real variables are exogenous. In a general equilibrium setting (in which real variables not only affect inflation, but are also influenced by it) the phenomenon of inflation inertia re-emerges. Under plausible parameter values, high degrees of inflation persistence (prolonged after-effects of inflation in response to temporary money growth shocks) and under-responsiveness (prolonged effects in response to permanent shocks) can arise in the context of standard wage-price staggering models.

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Paper provided by Money Macro and Finance Research Group in its series Money Macro and Finance (MMF) Research Group Conference 2005 with number 50.

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Date of creation: 03 Sep 2005
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Handle: RePEc:mmf:mmfc05:50

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Web page: http://www.essex.ac.uk/afm/mmf/index.html

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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
• E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
• E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

This paper has been announced in the following NEP Reports:

• NEP-ALL-2006-03-05 (All new papers)
• NEP-CBA-2006-03-05 (Central Banking)
• NEP-MAC-2006-03-05 (Macroeconomics)
• NEP-MON-2006-03-05 (Monetary Economics)

References

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Cited by:

1. Marika Karanassou & Hector Sala & Dennis Snower, 2008. "Phillips Curves and Unemployment Dynamics: A Critique and a Holistic Perspective," Kiel Working Papers 1441, Kiel Institute for the World Economy.
   
   • Marika Karanassou & Hector Sala & Dennis J. Snower, 2010. "Phillips Curves And Unemployment Dynamics: A Critique And A Holistic Perspective," Journal of Economic Surveys, Wiley Blackwell, vol. 24(1), pages 1-51, 02.
   • Marika Karanassou & Hector Sala & Dennis J. Snower, 2006. "Phillips Curves and Unemployment Dynamics: A Critique and a Holistic Perspective," Working Papers 573, Queen Mary, University of London, School of Economics and Finance.
   • Marika Karanassou & Hector Sala & Dennis J. Snower, 2008. "Phillips Curves and Unemployment Dynamics: A Critique and a Holistic Perspective," Discussion Papers 2008-08, School of Economics, The University of New South Wales.
   • Karanassou, Marika & Sala, Hector & Snower, Dennis J., 2006. "Phillips Curves and Unemployment Dynamics: A Critique and a Holistic Perspective," IZA Discussion Papers 2265, Institute for the Study of Labor (IZA).

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