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Fair Behavior and Inflation Persistence

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  • Seidel, Gerald

    ()
    (Sonderforschungsbereich 504)

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    Abstract

    In their seminal paper Fuhrer and Moore (1995) provide an explanation for the existence of inflation inertia. Driscoll and Holden (2003) argue that under more plausible assumptions the model of Fuhrer and Moore (1995) will coincide with the model of Taylor (1979) which can only explain sticky prices but not sticky inflation. Following the suggestions by Driscoll and Holden (2003) we extend their setting allowing for other-regarding preferences. It turns out that this new extended model is consistent with the one by Fuhrer and Moore (1995). This means that, even under the strong assumption of rational expectations, inflation is not only governed by its future expected but also by its past values. This is in line with empirical findings.

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    Bibliographic Info

    Paper provided by Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim in its series Sonderforschungsbereich 504 Publications with number 05-09.

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    Length: 11 pages
    Date of creation: 22 Feb 2005
    Date of revision:
    Handle: RePEc:xrs:sfbmaa:05-09

    Note: I would like to thank Björn Frank and Oliver Kirchkamp for helpful comments. Financial support from the Deutsche Forschungsgemeinschaft, SFB 504, at the University of Mannheim, is gratefully acknowledged.
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    Related research

    Keywords: inflation inertia; fairness; staggered contracts; inflation expectations; behavioral macroeconomics;

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    References

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    1. Brayton, Flint & Levin, Andrew & Lyon, Ralph & Williams, John C., 1997. "The evolution of macro models at the Federal Reserve Board," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 47(1), pages 43-81, December.
    2. Holden, Steinar & Driscoll, John C., 2003. "Coordination, Fair Treatment and Inflation Persistence," Memorandum 25/2002, Oslo University, Department of Economics.
    3. Steinar Holden & John C. Driscoll, 2003. "Inflation Persistence and Relative Contracting," American Economic Review, American Economic Association, vol. 93(4), pages 1369-1372, September.
    4. Falk, Armin & Fischbacher, Urs, 2006. "A theory of reciprocity," Games and Economic Behavior, Elsevier, vol. 54(2), pages 293-315, February.
    5. John M. Roberts, 1998. "Inflation expectations and the transmission of monetary policy," Finance and Economics Discussion Series 1998-43, Board of Governors of the Federal Reserve System (U.S.).
    6. F. Brayton & P. Tinsley, 1996. "A guide to FRB/US: a macroeconomic model of the United States," Finance and Economics Discussion Series 96-42, Board of Governors of the Federal Reserve System (U.S.).
    7. John M. Roberts, 1994. "Is inflation sticky?," Working Paper Series / Economic Activity Section 152, Board of Governors of the Federal Reserve System (U.S.).
    8. Amato, Jeffery D. & Laubach, Thomas, 2003. "Rule-of-thumb behaviour and monetary policy," European Economic Review, Elsevier, vol. 47(5), pages 791-831, October.
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