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Output And Inflation In Models Of The Business Cycle With Nominal Rigidities: Further Counterfactual Implications

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  • Juan Páez‐Farrell

Abstract

This paper examines the relationship between cyclical output and inflation in models commonly used for monetary policy analysis. This includes models that incorporate the New Keynesian, Fuhrer–Moore and backward‐looking Phillips curves. The main finding is that these models imply a strong negative relationship between inflation and output, a result that is at odds with the data. The fact that New Keynesian models yield counterfactual implications is not new; the novelty of the paper lies in the fact that the finding extends to the other variants, such as the backward‐looking Phillips Curve, which have been put forward as displaying superior dynamics.

Suggested Citation

  • Juan Páez‐Farrell, 2007. "Output And Inflation In Models Of The Business Cycle With Nominal Rigidities: Further Counterfactual Implications," Scottish Journal of Political Economy, Scottish Economic Society, vol. 54(4), pages 475-491, September.
    • Handle: RePEc:bla:scotjp:v:54:y:2007:i:4:p:475-491
    DOI: 10.1111/j.1467-9485.2007.00425.x
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