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Intrinsic and Inherited Inflation Persistence

  • Jeffrey C. Fuhrer

    (Federal Reserve Bank of Boston)

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.

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Article provided by International Journal of Central Banking in its journal International Journal of Central Banking.

Volume (Year): 2 (2006)
Issue (Month): 3 (September)
Pages:

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Handle: RePEc:ijc:ijcjou:y:2006:q:3:a:2
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