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A Phillips Curve with an Ss Foundation

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  • Mark Gertler
  • John Leahy

Abstract

We develop an analytically tractable Phillips curve based on state-dependent pricing. We differ from the existing literature by considering a local approximation around a zero inflation steady state and introducing idiosyncratic shocks. The resulting Phillips curve is a simple variation of the conventional time-dependent Calvo formulation, but with some important differences. First, the model is able to match the micro evidence on both the magnitude and timing of price adjustments. Second, holding constant the frequency of price adjustment, our state-dependent model exhibits greater flexibility in the aggregate price level than does the time-dependent model. On the other hand, with real rigidities present, our state-dependent pricing framework can exhibit considerable nominal stickiness, of the same order by a conventional time-dependent model.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11971.

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Date of creation: Jan 2006
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Publication status: published as Gertler, Mark and John Leahy. "A Phillips Curve with an Ss Foundation." Journal of Political Economy 116, 3 (2008).
Handle: RePEc:nbr:nberwo:11971

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