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The Inflation Persistence of Staggered Contracts

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  • Guerrieri, Luca

Abstract

One of the criticisms routinely advanced against models with staggered contracts is their inability to generate inflation persistence. This paper finds that staggered contracts a la Taylor are, in fact, capable of reproducing the inflation persistence implied by U.S. data. Following Fuhrer and Moore, I capture the moments that the model needs to replicate by using the correlograms from a small vector autoregression (VAR). I estimate the contract parameters using the method of maximum likelihood. The correlogram of inflation for the contract model is very close to the correlogram from the VAR. By the same metric, Taylor contracts fare poorly in reproducing the comovements of inflation and output.

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  • Guerrieri, Luca, 2006. "The Inflation Persistence of Staggered Contracts," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(2), pages 483-494, March.
  • Handle: RePEc:mcb:jmoncb:v:38:y:2006:i:2:p:483-494
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    Cited by:

    1. Bakhshi, Hasan & Khan, Hashmat & Rudolf, Barbara, 2007. "The Phillips curve under state-dependent pricing," Journal of Monetary Economics, Elsevier, vol. 54(8), pages 2321-2345, November.
    2. Laura D’Amato & María Lorena Garegnani, 2009. "Short-Run Dynamics of Inflation: Estimating a Hybrid New-Keynesian Phillips Curve for Argentina (1993-2007)," Ensayos Económicos, Central Bank of Argentina, Economic Research Department, vol. 1(55), pages 33-56, July - Se.
    3. Karl Whelan, 2007. "Staggered Price Contracts And Inflation Persistence: Some General Results," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 48(1), pages 111-145, February.
    4. Jeremy Rudd & Karl Whelan, 2006. "Can Rational Expectations Sticky-Price Models Explain Inflation Dynamics?," American Economic Review, American Economic Association, vol. 96(1), pages 303-320, March.
    5. Dixon, Huw David, 2009. "A unified framework for understanding and comparing dynamic wage and price setting models," Cardiff Economics Working Papers E2009/20, Cardiff University, Cardiff Business School, Economics Section.
    6. Argia M. Sbordone, 2006. "U.S. Wage and Price Dynamics: A Limited-Information Approach," International Journal of Central Banking, International Journal of Central Banking, vol. 2(3), September.
    7. Whelan, Karl, 2004. "Staggered price contracts and inflation persistence: some general results," Working Paper Series 417, European Central Bank.
    8. Sheedy, Kevin D., 2010. "Intrinsic inflation persistence," Journal of Monetary Economics, Elsevier, vol. 57(8), pages 1049-1061, November.
    9. Guerrieri, Luca, 2004. "Comments on "Monetary policy rules and exchange rate flexibility in a simple dynamic general equilibrium model"," Journal of Macroeconomics, Elsevier, vol. 26(2), pages 315-317, June.
    10. Sharon Kozicki & Peter A. Tinsley, 2002. "Alternative sources of the lag dynamics of inflation," Research Working Paper RWP 02-12, Federal Reserve Bank of Kansas City.
    11. Huw David Dixon & Kun Tian, 2017. "What We can Learn About the Behaviour of Firms from the Average Monthly Frequency of Price-Changes: An Application to the UK CPI Data," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 79(6), pages 907-932, December.
    12. Agénor, Pierre-Richard & Bayraktar, Nihal, 2010. "Contracting models of the Phillips curve empirical estimates for middle-income countries," Journal of Macroeconomics, Elsevier, vol. 32(2), pages 555-570, June.
    13. Musy, Olivier & Pereau, Jean-Christophe, 2010. "Disinflationary boom in a price-wage spiral model," Economic Modelling, Elsevier, vol. 27(1), pages 152-158, January.
    14. Huw Dixon & Hervé Le Bihan, 2012. "Generalised Taylor and Generalised Calvo Price and Wage Setting: Micro‐evidence with Macro Implications," Economic Journal, Royal Economic Society, vol. 122(560), pages 532-554, May.
    15. Coenen, Gunter, 2007. "Inflation persistence and robust monetary policy design," Journal of Economic Dynamics and Control, Elsevier, vol. 31(1), pages 111-140, January.
    16. Huw D. Dixon, 2010. "A Unified Framework for Using Micro-Data to Compare Dynamic Wage and Price Setting Models," CESifo Working Paper Series 3093, CESifo Group Munich.
    17. Marianna Riggi, 2007. "New Keynesian models with labor market rigidities: a critical survey," Working Papers 102, University of Rome La Sapienza, Department of Public Economics.
    18. Taylor, J.B., 2016. "The Staying Power of Staggered Wage and Price Setting Models in Macroeconomics," Handbook of Macroeconomics, Elsevier.
    19. Dixon, Huw, 2006. "The distribution of contract durations across firms: a unified framework for understanding and comparing dynamic wage and price setting models," Working Paper Series 676, European Central Bank.
    20. Fabio Milani, 2005. "Adaptive Learning and Inflation Persistence," Working Papers 050607, University of California-Irvine, Department of Economics.
    21. Andreas Hornstein & Alexander L. Wolman, 2005. "Trend inflation, firm-specific capital, and sticky prices," Economic Quarterly, Federal Reserve Bank of Richmond, issue Fall, pages 57-83.
    22. Felipe Schwartzman & Carlos Carvalho, 2008. "Heterogeneous Price Setting Behavior and Monetary Non-neutrality: Some General Results," 2008 Meeting Papers 1040, Society for Economic Dynamics.

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