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A Phillips Curve with an Ss Foundation

  • Mark Gertler
  • John Leahy

We develop an analytically tractable Phillips curve based on state-dependent pricing. We consider a local approximation around a zero inflation steady state and introduce infrequent idiosyncratic shocks. The resulting Phillips curve is a simple variant of the conventional time-dependent Calvo formulation with important differences. First, the model is able to match the micro evidence on the magnitude and timing of price adjustments. Second, our state-dependent model exhibits greater flexibility in the aggregate price level than the time-dependent model. With real rigidities present, however, our model can exhibit nominal stickiness similar to a conventional time-dependent model. (c) 2008 by The University of Chicago. All rights reserved.

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Article provided by University of Chicago Press in its journal Journal of Political Economy.

Volume (Year): 116 (2008)
Issue (Month): 3 (06)
Pages: 533-572

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Handle: RePEc:ucp:jpolec:v:116:y:2008:i:3:p:533-572
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