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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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File URL: http://eprints.lse.ac.uk/3739/
File Function: Open access version.
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Paper provided by London School of Economics and Political Science, LSE Library in its series LSE Research Online Documents on Economics with number 3739.

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Length: 48 pages
Date of creation: Nov 2007
Date of revision:
Handle: RePEc:ehl:lserod:3739
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