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Intrinsic inflation persistence

  • Sheedy, Kevin D.

Empirical evidence suggests that inflation determination is not purely forward-looking, but models of price setting have struggled to rationalize this finding without directly assuming backward-looking pricing rules for firms. This paper shows that intrinsic inflation persistence can be explained with no deviation from optimizing, forward-looking behaviour if prices that have remained fixed for longer are more likely to be changed than those set recently. A relationship between the probability of price adjustment and the duration of a price spell is shown to imply a simple "hybrid" Phillips curve including lagged and expected inflation, which is estimated using macroeconomic data.

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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 57 (2010)
Issue (Month): 8 (November)
Pages: 1049-1061

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Handle: RePEc:eee:moneco:v:57:y:2010:i:8:p:1049-1061
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505566

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