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Hump-shaped Behavior of Inflation and Dynamic Externality

  • Takayuki Tsuruga

This paper develops a model which can explain the hump-shaped impulse response of inflation to a monetary shock. A standard New Keynesian (NK) model is augmented so as to include dynamic externality with sticky wages and variable capital utilization. In our analysis, we assume purely forward-looking nominal rigidities in nominal prices and wages a la Calvo(1983). Nevertheless, we can show that inflation is hump-shaped under a reasonable range of parameters. It will be also shown that, in order for inflation to be hump-shaped, sticky wages and variable capital utilization are important as well as dynamic externalities.

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Paper provided by Econometric Society in its series Econometric Society 2004 Far Eastern Meetings with number 614.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:feam04:614
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