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A Microfounded Mechanism of Observed Substantial Inflation Persistence

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  • Harashima, Taiji

Abstract

Recently, it has been argued that trend inflation may be the solution to the puzzle of inflation persistence in the New Keynesian Phillips curve (NKPC). However, incorporating trend inflation into the NKPC raises another serious problem—it lacks a microfoundation. The paper presents a microfoundation for trend inflation, which indicates that trend inflation is a natural consequence of simultaneous optimization by the government and households. A purely forward-looking model is constructed based on the microfoundation presented. The model enables a unified explanation for various types of inflation. It also indicates that, if inflation is assumed to follow an autoregressive process without considering trend inflation, many measures of inflation persistence will spuriously indicate that inflation is intrinsically substantially persistent and has a backward-looking property.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 10668.

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Date of creation: 21 Sep 2008
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Handle: RePEc:pra:mprapa:10668

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Keywords: Inflation persistence; The New Keynesian Phillips curve; Central bank independence; Trend inflation; The fiscal theory of the price level;

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Cited by:
  1. Harashima, Taiji, 2009. "Depression as a Nash Equilibrium Consisting of Strategies of Choosing a Pareto Inefficient Transition Path," MPRA Paper 18953, University Library of Munich, Germany.
  2. Harashima, Taiji, 2011. "A Mechanism of Inflation Differentials and Current Account Imbalances in the Euro Area," MPRA Paper 28121, University Library of Munich, Germany.
  3. Harashima, Taiji, 2013. "The Phillips Curve and a Micro-foundation of Trend Inflation," MPRA Paper 51305, University Library of Munich, Germany.

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