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Can rational expectations sticky-price models explain inflation dynamics?

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  • Rudd, Jeremy
  • Whelan, Karl

Abstract

The canonical inflation specification in sticky-price rational expectations models (the new-Keynesian Phillips curve) is often criticized for failing to account for the dependence of inflation on its own lags. In response, many studies employ a “hybrid” specification in which inflation depends on its lagged and expected future values, together with a driving variable such as the output gap. We consider some simple tests of the hybrid model that are derived from its closed form. We find that the hybrid model describes inflation dynamics poorly, and find little empirical evidence for the type of rational, forward-looking behavior that the model implies.

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File URL: http://researchrepository.ucd.ie/bitstream/10197/199/4/whelank_article_pub_028.pdf
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Bibliographic Info

Paper provided by University College Dublin in its series Open Access publications from University College Dublin with number urn:hdl:10197/199.

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Length: 18
Date of creation: Mar 2006
Date of revision:
Publication status: Published in American Economic Review (2006-03) v.96, p.303-320
Handle: RePEc:ner:ucddub:urn:hdl:10197/199

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Web page: http://www.ucd.ie

Related research

Keywords: Inflation (Finance); Rational expectations (Economic theory); Economic policy; Pricing;

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