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Optimising Microfoundations for Inflation Persistence

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  • Richard Mash

    (Oxford University)

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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Bibliographic Info

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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