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Backward-Looking Contracts, Credibility and Inflation Convergence

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  • Ghezzi, Piero

Abstract

In this paper, we build a model that incorporates a backward-looking component to the exclusively forward-looking staggered prices model of Calvo (1983). The objective of this formulation is to include the effect of the history of high inflation on the price formation, reflected in the existence of widespread backward-looking indexation (-de facto or de jure-). Thus, the model is able to isolate the effects of history in price setting from the genuinely forward-looking lack of credibility arising from the intertemporal inconsistency between fiscal and monetary policy. One remarkable feature of the model is that it remains analytically tractable despite its enhanced dynamics. When used to simulate, the model replicates inflation persistence and real appreciation. Immediate inflation convergence is not achievable even if the economy's fundamentals would say so.

Suggested Citation

  • Ghezzi, Piero, 1996. "Backward-Looking Contracts, Credibility and Inflation Convergence," Center for International and Development Economics Research (CIDER) Working Papers 233441, University of California-Berkeley, Department of Economics.
    • Handle: RePEc:ags:ucbewp:233441
    DOI: 10.22004/ag.econ.233441
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    References listed on IDEAS

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    Cited by:

    1. Maurice Obstfeld, 1989. "Dynamic Seigniorage Theory: An Exploration," NBER Working Papers 2869, National Bureau of Economic Research, Inc.

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