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Inflation persistence and flexible prices

Author

Listed:
  • Robert Dittmar
  • William T. Gavin
  • Finn E. Kydland

Abstract

If the central bank follows an interest rate rule, then inflation is likely to be persistence, even when prices are fully flexible. Any shock, whether persistent or not, may lead to inflation persistence. In equilibrium, the dynamics of inflation are determined by the evolution of the spread between the real interest rate and the central bank?s target. Inflation persistence in U.S. data can be characterized by a vector autocorrelation function relating inflation and deviations of output from trend. This paper shows that a flexible-price general equilibrium business cycle model with money and a central bank using an interest rate target can account for such inflation persistence.

Suggested Citation

  • Robert Dittmar & William T. Gavin & Finn E. Kydland, 2004. "Inflation persistence and flexible prices," Working Papers 2001-010, Federal Reserve Bank of St. Louis.
    • Handle: RePEc:fip:fedlwp:2001-010
    DOI: 10.20955/wp.2001.010
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    References listed on IDEAS

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    More about this item

    Keywords

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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System

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