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Arrow-Calvo Price Staggering

  • PETER MCADAM
  • ALPO WILLMAN

We merge Arrow and Calvo pricing themes leading to a price-resetting signal dependent on inflation and competitiveness. This allows us to tractably analyse state-dependent issues and to develop a New Keynesian Phillips curve (NKPC) expressed for the levels of variables and a specification which is not regime dependent. The standard NKPC arises as a special case. Using non-linear simulation and estimation techniques, we then demonstrate the importance of regime dependence in inflation dynamics and show that standard NKPCs are mis-specified even in low-inflation regimes. We further detect strong intrinsic persistence in historical US inflation. Copyright � 2010 The Authors. The Manchester School � 2010 Blackwell Publishing Ltd and The University of Manchester.

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1467-9957.2009.02156.x
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Article provided by University of Manchester in its journal The Manchester School.

Volume (Year): 78 (2010)
Issue (Month): 6 (December)
Pages: 556-581

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Handle: RePEc:bla:manchs:v:78:y:2010:i:6:p:556-581
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