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Can We Explain Inflation Persistence in a Way that Is Consistent with the Microevidence on Nominal Rigidity?

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  • HUW DIXON
  • ENGIN KARA

Abstract

This paper adopts the impulse‐response methodology to understand inflation persistence. It has often been argued that existing models of pricing fail to explain the persistence that we observe. We adopt a common general framework that allows for an explicit modeling of the distribution of contract lengths and for different types of price setting. We also evaluate how far the theories are consistent with recent evidence on price and wage rigidity. We find that allowing for a distribution of durations can take us a long way to solving the puzzle of inflation persistence, but not all the way yet.

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  • Huw Dixon & Engin Kara, 2010. "Can We Explain Inflation Persistence in a Way that Is Consistent with the Microevidence on Nominal Rigidity?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(1), pages 151-170, February.
    • Handle: RePEc:wly:jmoncb:v:42:y:2010:i:1:p:151-170
    DOI: 10.1111/j.1538-4616.2009.00282.x
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    JEL classification:

    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles

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