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The inflation persistence of staggered contracts

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Abstract

One of the criticisms routinely advanced against models of the business cycle with staggered contracts is their inability to generate inflation persistence. This paper finds that staggered Taylor contracts are, in fact, capable of reproducing the inflation persistence implied by U.S. data. Following Fuhrer and Moore, I capture the moments that the contract specification needs to replicate by using the correlograms from a small vector autoregression (VAR) that includes inflation among the endogenous variables. A simple structural model substitutes the inflation equation from the VAR with the contract specification. I estimate the contract parameters in the structural model by maximum likelihood. The correlogram for the endogenous variables from the estimated structural model, including that for inflation, are very close to the correlograms from the VAR (and are contained within their 90% confidence intervals). By the same metric, where Taylor contracts do not fare well is in reproducing the cross-correlations between inflation and output.

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  • Luca Guerrieri, 2002. "The inflation persistence of staggered contracts," International Finance Discussion Papers 734, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgif:734
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    Cited by:

    1. Karl Whelan, 2007. "Staggered Price Contracts And Inflation Persistence: Some General Results," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 48(1), pages 111-145, February.
    2. Jeremy Rudd & Karl Whelan, 2006. "Can Rational Expectations Sticky-Price Models Explain Inflation Dynamics?," American Economic Review, American Economic Association, vol. 96(1), pages 303-320, March.
    3. Dixon, Huw David, 2009. "A unified framework for understanding and comparing dynamic wage and price setting models," Cardiff Economics Working Papers E2009/20, Cardiff University, Cardiff Business School, Economics Section.
    4. Argia M. Sbordone, 2006. "U.S. Wage and Price Dynamics: A Limited-Information Approach," International Journal of Central Banking, International Journal of Central Banking, vol. 2(3), September.
    5. Sheedy, Kevin D., 2010. "Intrinsic inflation persistence," Journal of Monetary Economics, Elsevier, vol. 57(8), pages 1049-1061, November.
    6. Guerrieri, Luca, 2004. "Comments on "Monetary policy rules and exchange rate flexibility in a simple dynamic general equilibrium model"," Journal of Macroeconomics, Elsevier, vol. 26(2), pages 315-317, June.
    7. Musy, Olivier & Pereau, Jean-Christophe, 2010. "Disinflationary boom in a price-wage spiral model," Economic Modelling, Elsevier, vol. 27(1), pages 152-158, January.
    8. Ichiro Fukunaga, 2007. "Imperfect Common Knowledge, Staggered Price Setting, and the Effects of Monetary Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(7), pages 1711-1739, October.
    9. Huw Dixon & Hervé Le Bihan, 2012. "Generalised Taylor and Generalised Calvo Price and Wage Setting: Micro‐evidence with Macro Implications," Economic Journal, Royal Economic Society, vol. 122(560), pages 532-554, May.
    10. Agénor, Pierre-Richard & Bayraktar, Nihal, 2010. "Contracting models of the Phillips curve empirical estimates for middle-income countries," Journal of Macroeconomics, Elsevier, vol. 32(2), pages 555-570, June.
    11. Coenen, Gunter, 2007. "Inflation persistence and robust monetary policy design," Journal of Economic Dynamics and Control, Elsevier, vol. 31(1), pages 111-140, January.
    12. Huw David Dixon & Kun Tian, 2017. "What We can Learn About the Behaviour of Firms from the Average Monthly Frequency of Price-Changes: An Application to the UK CPI Data," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 79(6), pages 907-932, December.
    13. Taylor, J.B., 2016. "The Staying Power of Staggered Wage and Price Setting Models in Macroeconomics," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 2009-2042, Elsevier.
    14. Dixon, Huw, 2006. "The distribution of contract durations across firms: a unified framework for understanding and comparing dynamic wage and price setting models," Working Paper Series 676, European Central Bank.
    15. Sharon Kozicki & Peter A. Tinsley, 2002. "Alternative sources of the lag dynamics of inflation," Research Working Paper RWP 02-12, Federal Reserve Bank of Kansas City.
    16. Felipe Schwartzman & Carlos Carvalho, 2008. "Heterogeneous Price Setting Behavior and Monetary Non-neutrality: Some General Results," 2008 Meeting Papers 1040, Society for Economic Dynamics.
    17. Bakhshi, Hasan & Khan, Hashmat & Rudolf, Barbara, 2007. "The Phillips curve under state-dependent pricing," Journal of Monetary Economics, Elsevier, vol. 54(8), pages 2321-2345, November.
    18. Giovanni Di Bartolomeo & Marco Di Pietro, 2017. "Intrinsic Persistence of Wage Inflation in New Keynesian Models of the Business Cycles," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 49(6), pages 1161-1195, September.
    19. Carlos Carvalho & Niels Arne Dam & Jae Won Lee, 2020. "The Cross-Sectional Distribution of Price Stickiness Implied by Aggregate Data," The Review of Economics and Statistics, MIT Press, vol. 102(1), pages 162-179, March.
    20. Huw D. Dixon, 2010. "A Unified Framework for Using Micro-Data to Compare Dynamic Wage and Price Setting Models," CESifo Working Paper Series 3093, CESifo.
    21. Marianna Riggi, 2007. "New Keynesian models with labor market rigidities: a critical survey," Working Papers in Public Economics 102, University of Rome La Sapienza, Department of Economics and Law.
    22. Adebayo Mohammed Ojuolape & Deborah Boluwatife Adeniyi & Ayodele Folorunso Oshodi & Nusirat Ojuolape Gold, 2020. "Impact of Trade Openness on Industrialization in Nigeria," Pakistan Journal of Humanities and Social Sciences, International Research Association for Sustainable Development (iRASD), vol. 8(1), pages :15-22, March.
    23. Fabio Milani, 2005. "Adaptive Learning and Inflation Persistence," Working Papers 050607, University of California-Irvine, Department of Economics.
    24. Andreas Hornstein & Alexander L. Wolman, 2005. "Trend inflation, firm-specific capital, and sticky prices," Economic Quarterly, Federal Reserve Bank of Richmond, vol. 91(Fall), pages 57-83.

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    Inflation (Finance); Phillips curve;

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