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Optimising Microfoundations for Inflation Persistence

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Author Info
Richard Mash (Oxford University)

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Abstract

We connect two major strands of the recent monetary policy literature, i) the search for well microfounded optimising models consistent with macroeconomic data, especially persistence in inflation, and ii) the wealth of newly available microeconomic data on price changing behaviour from the ECB’s Inflation Persistence Network, alongside earlier firm surveys for the US, UK and Sweden. We develop a fully optimising Phillips curve following Goodfriend and King (NBER Macro Annual,1997) that may be calibrated to virtually any time dependent pricing rule but extended to include cost push shocks and the aggregation of sectors with different pricing rules. Analytical results include a tendency for aggregate dynamics to be driven by “stickier†sectors. When calibrated to micro data the model predicts inflation persistence comparable to that in macro data with fully forward looking underlying pricing behaviour

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Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2006 with number 457.

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Date of creation: 04 Jul 2006
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Handle: RePEc:sce:scecfa:457

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Keywords: Monetary policy; Phillips curve; Inflation Persistence; Microfoundations;

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Find related papers by JEL classification:
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
E22 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity

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References listed on IDEAS
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    Other versions:
  2. Michael Dotsey, 2002. "Pitfalls in interpreting tests of backward-looking pricing in New Keynesian models," Economic Quarterly, Federal Reserve Bank of Richmond, issue Win, pages 37-50. [Downloadable!]
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Adolfson, Malin & Laséen, Stefan & Lindé, Jesper & Villani, Mattias, 2005. "Bayesian Estimation of an Open Economy DSGE Model with Incomplete Pass-Through," Working Paper Series 179, Sveriges Riksbank (Central Bank of Sweden). [Downloadable!]
    Other versions:
  2. Luc Aucremanne & Emmanuel Dhyne, 2005. "Time-dependent versus State-dependent Pricing: A Panel Data Approach to the Determinants of Belgian Consumer Price Changes," Research series 200504-1, National Bank of Belgium. [Downloadable!]
  3. Richard Mash, 2005. "Simple Pricing Rules, the Phillips Curve and the Microfoundations of Inflation Persistence," Computing in Economics and Finance 2005 427, Society for Computational Economics. [Downloadable!]
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  4. Tatiana Damjanovic & Charles Nolan, 2006. " Relative Price Distortions and Inflation Persistence," CDMA Working Paper Series 0611, Centre for Dynamic Macroeconomic Analysis. [Downloadable!]
  5. Richard Mash, 2003. "A Note on Simple MSV Solution Methods for Rational Expectations Models of Monetary Policy," Economics Series Working Papers 173, University of Oxford, Department of Economics. [Downloadable!]
  6. Yao, Fang, 2009. "Time-dependent pricing and New Keynesian Phillips curve," Discussion Paper Series 1: Economic Studies 2009,08, Deutsche Bundesbank, Research Centre. [Downloadable!]
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