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Partial Indexation, Trend Inflation, and the Hybrid Phillips Curve

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  • Sahuc, J-G.

Abstract

This paper proposes a full description of the Calvo price-setting model based on partial prices indexation and studies the interaction between partial indexation and trend inflation. We show that using a hybrid version of the Phillips curve partly decreases the risks of overestimate due to the omission of trend inflation. We also provide new evidence on the fit of the hybrid Phillips curve for the Euro area and the United States over the period 1970-2002. The GMM-West estimates suggest that (i) a full indexation scheme is not data consistent whereas a partial indexation scheme allows a good fit and (ii) forgetting trend inflation induces overestimating by approximately 3-4 percent of the probability to not change the price, for reasonable values of trend inflation.

Suggested Citation

  • Sahuc, J-G., 2004. "Partial Indexation, Trend Inflation, and the Hybrid Phillips Curve," Working papers 118, Banque de France.
    • Handle: RePEc:bfr:banfra:118
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    References listed on IDEAS

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    1. Hasan Bakhshi & Pablo Burriel-Llombart, 2003. "Endogenous Price Stickiness, Trend Inflation, and the New Keynesian Phillips Curve," Computing in Economics and Finance 2003 12, Society for Computational Economics.
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    3. Guido Ascari, 2004. "Staggered Prices and Trend Inflation: Some Nuisances," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 7(3), pages 642-667, July.
    4. Gali, Jordi & Gertler, Mark & Lopez-Salido, J. David, 2001. "European inflation dynamics," European Economic Review, Elsevier, vol. 45(7), pages 1237-1270.
    5. Jean-Guillaume Sahuc, 2002. "A 'hybrid' monetary policy model: evidence from the Euro area," Applied Economics Letters, Taylor & Francis Journals, vol. 9(14), pages 949-955.
    6. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2005. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 113(1), pages 1-45, February.
    7. repec:zbw:bofrdp:2003_027 is not listed on IDEAS
    8. Frank Smets & Raf Wouters, 2003. "An Estimated Dynamic Stochastic General Equilibrium Model of the Euro Area," Journal of the European Economic Association, MIT Press, vol. 1(5), pages 1123-1175, September.
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    More about this item

    Keywords

    Phillips curve ; Inflation inertia ; Trend inflation ; Degree of indexation;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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