Persistent Issues in Inflation Persistence
One of the criticisms routinely advanced against models of the business cycle with staggered contracts is their inability to generate inflation persistence. This paper finds that staggered contracts µa 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 contract speci¯cation needs to replicate by using the correlograms from a small vector autoregression (VAR), that includes in°ation among the endogenous variables. A simple structural model substitutes the in°ation equation from the VAR with the contract specification. I estimate the contract parameters in the structural model by maximum likelihood. The correlogram for the endogenous variables from the estimated structural model, including that for in°ation, are very close to the correlograms from the VAR (and are contained within their 90% confidence intervals)
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