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Staggered price contracts and inflation persistence: some general results

  • Whelan, Karl

Despite their popularity as theoretical tools for illustrating the effects of nominal rigidities, some have questioned whether models based on Taylor-style staggered contracts can match the persistence of the empirical inflation process. This paper presents some general theoretical results about Taylor-style models. It is shown that these models do not have a problem matching high autocorrelations for inflation. However, they fail to explain a key feature of reduced-form Phillips-curve regressions: The positive dependence of inflation on its own lags. It is shown that staggered price contracting models instead predict that the coefficients on these lag terms should be negative. JEL Classification: E31

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Paper provided by European Central Bank in its series Working Paper Series with number 0417.

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Date of creation: Nov 2004
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Handle: RePEc:ecb:ecbwps:20040417
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  1. Jeff Fuhrer & George Moore, 1993. "Inflation persistence," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
  2. Taylor, John B, 1979. "Staggered Wage Setting in a Macro Model," American Economic Review, American Economic Association, vol. 69(2), pages 108-13, May.
  3. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2000. "Sticky Price Models of the Business Cycle: Can the Contract Multiplier Solve the Persistence Problem?," Econometrica, Econometric Society, vol. 68(5), pages 1151-1180, September.
  4. Binder,M. & Pesaran,H.M., 1995. "Multivariate Rational Expectations Models and Macroeconomic Modelling: A Review and Some New Results," Cambridge Working Papers in Economics 9415, Faculty of Economics, University of Cambridge.
  5. Galí, Jordi & Gertler, Mark & López-Salido, J David, 2001. "European Inflation Dynamics," CEPR Discussion Papers 2684, C.E.P.R. Discussion Papers.
  6. Luca Guerrieri, 2002. "The inflation persistence of staggered contracts," International Finance Discussion Papers 734, Board of Governors of the Federal Reserve System (U.S.).
  7. O'Reilly,Gerard & Whelan, Karl, 2004. "Has Euro-Area Inflation Persistence Changed Over Time?," Research Technical Papers 4/RT/04, Central Bank of Ireland.
  8. Gali, Jordi & Gertler, Mark, 1999. "Inflation dynamics: A structural econometric analysis," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 195-222, October.
  9. Fagan, Gabriel & Henry, Jérôme & Mestre, Ricardo, 2001. "An area-wide model (AWM) for the euro area," Working Paper Series 0042, European Central Bank.
  10. Michael Dotsey, 2002. "Pitfalls in interpreting tests of backward-looking pricing in New Keynesian models," Economic Quarterly, Federal Reserve Bank of Richmond, issue Win, pages 37-50.
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