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Intrinsic Inflation Persistence

  • Kevin D. Sheedy

It is often argued that the New Keynesian Phillips curve is at odds with the data because it cannot explain inflation persistence — the difficulty of returning inflation immediately to target after a shock without any loss of output. This paper explains how a model where newer prices are stickier than older prices is consistent with this phenomenon, even though it introduces no deviation from optimizing, forwards-looking price setting. The probability of adjusting new and old prices is estimated using a novel method that draws only on macroeconomic data, and the findings strongly support the premise of the model.

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Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp0837.

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Date of creation: Nov 2007
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Handle: RePEc:cep:cepdps:dp0837
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