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Inflation dynamics: a cross-country investigation

  • Pengfei Wang
  • Yi Wen

We document that "persistent and lagged" inflation (with respect to output) is a world-wide phenomenon in that these short-run inflation dynamics are highly synchronized across countries. In particular, the average cross-country correlation of inflation is significantly and systematically stronger than that of output, while the cross-country correlation of money growth is essentially zero. We investigate whether standard monetary models driven by monetary shocks are consistent with the empirical facts. We find that neither the new Keynesian sticky-price model nor the sticky-information model can fully explain the data. An independent contribution of the paper is to provide a simple solution technique for solving general equilibrium models with sticky information. ; Earlier title: Inflation and money: a puzzle

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File URL: http://research.stlouisfed.org/wp/2005/2005-076.pdf
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Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2005-076.

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Date of creation: 2006
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Publication status: Published in Journal of Monetary Economics, October 2007, 54(7), pp. 2004-31
Handle: RePEc:fip:fedlwp:2005-076
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  25. Andres, Javier & Lopez-Salido, J. David & Nelson, Edward, 2005. "Sticky-price models and the natural rate hypothesis," Journal of Monetary Economics, Elsevier, vol. 52(5), pages 1025-1053, July.
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  27. Benjamin D. Keen, 2007. "Sticky Price And Sticky Information Price-Setting Models: What Is The Difference?," Economic Inquiry, Western Economic Association International, vol. 45(4), pages 770-786, October.
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