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Intrinsic and Inherited Inflation Persistence

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  • Jeffrey C. Fuhrer

    (Federal Reserve Bank of Boston)

Abstract

In the conventional view of inflation, the New Keynesian Phillips curve (NKPC) captures most of the persistence in inflation. The sources of persistence are twofold. First, the "driving process" for inflation is quite persistent, and the NKPC implies that inflation must "inherit" this persistence. Second, backward-looking or indexing behavior imparts some "intrinsic" persistence to inflation. This paper shows that, in practice, inflation in the NKPC inherits very little of the persistence of the driving process, and it is intrinsic persistence that constitutes the dominant source of persistence. The reasons are that, first, the coefficient on the driving process is small, and, second, the shock that disturbs the NKPC is large.

Suggested Citation

  • Jeffrey C. Fuhrer, 2006. "Intrinsic and Inherited Inflation Persistence," International Journal of Central Banking, International Journal of Central Banking, vol. 2(3), September.
  • Handle: RePEc:ijc:ijcjou:y:2006:q:3:a:2
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    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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