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Non-constant Hazard Function and Inflation Dynamics

  • Fang Yao
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    This paper explores implications of nominal rigidity characterized by a non-constant hazard function for aggregate dynamics. I derive the NKPC under an arbitrary hazard function and parameterize it with the Weibull duration model. The resulting Phillips curve involves lagged inflation and lagged expectations. It nests the Calvo NKPC as a limiting case in the sense that the effects of both terms are canceled out under the constant-hazard assumption. Furthermore, I find lagged inflation always has negative coefficients, thereby making it impossible to interpret inflation persistence as intrinsic. The numerical evaluation shows that the increasing hazard function leads to hump-shaped impulse responses of in‡ation to monetary shocks, and output leads inflation.

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    File URL: http://sfb649.wiwi.hu-berlin.de/papers/pdf/SFB649DP2009-030.pdf
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    Paper provided by Sonderforschungsbereich 649, Humboldt University, Berlin, Germany in its series SFB 649 Discussion Papers with number SFB649DP2009-030.

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    Length: 25 pages
    Date of creation: May 2009
    Date of revision:
    Handle: RePEc:hum:wpaper:sfb649dp2009-030
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    1. Mark Bils & Peter J. Klenow & Benjamin A. Malin, 2012. "Reset Price Inflation and the Impact of Monetary Policy Shocks," American Economic Review, American Economic Association, vol. 102(6), pages 2798-2825, October.
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    4. N. Gregory Mankiw & Ricardo Reis, 2001. "Sticky Information Versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve," Harvard Institute of Economic Research Working Papers 1922, Harvard - Institute of Economic Research.
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    6. Richard Mash, 2004. "Optimising Microfoundations for Inflation Persistence," Economics Series Working Papers 183, University of Oxford, Department of Economics.
    7. Dixit, Avinash K & Stiglitz, Joseph E, 1975. "Monopolistic Competition and Optimum Product Diversity," The Warwick Economics Research Paper Series (TWERPS) 64, University of Warwick, Department of Economics.
    8. Emmanuel Dhyne & Luis J. Alvarez & Herve Le Bihan & Giovanni Veronese & Daniel Dias & Johannes Hoffmann & Nicole Jonker & Patrick Lunnemann & Fabio Rumler & Jouko Vilmunen, 2006. "Price Changes in the Euro Area and the United States: Some Facts from Individual Consumer Price Data," Journal of Economic Perspectives, American Economic Association, vol. 20(2), pages 171-192, Spring.
    9. Kevin D. Sheedy, 2007. "Intrinsic inflation persistence," LSE Research Online Documents on Economics 3739, London School of Economics and Political Science, LSE Library.
    10. Jeffrey R. Campbell & Benjamin Eden, 2005. "Rigid prices: evidence from U.S. scanner data," Working Paper Series WP-05-08, Federal Reserve Bank of Chicago.
    11. Luis J. Álvarez, 2007. "What do micro price data tell us on the validity of the New Keynesian Phillips Curve?," Working Papers 0728, Banco de España;Working Papers Homepage.
    12. Jeff Fuhrer & George Moore, 1995. "Inflation Persistence," The Quarterly Journal of Economics, Oxford University Press, vol. 110(1), pages 127-159.
    13. Richard Mash, 2004. "Optimising microfoundations for observed inflation persistence," Money Macro and Finance (MMF) Research Group Conference 2003 60, Money Macro and Finance Research Group.
    14. Alexander Meyer-Gohde, 2007. "Solving Linear Rational Expectations Models with Lagged Expectations Quickly and Easily," SFB 649 Discussion Papers SFB649DP2007-069, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    15. Lorenz Goette & Rudolf Minsch & Jean-Robert Tyran, 2005. "Micro Evidence on the Adjustment of Sticky-Price Goods: It's How Often, not How Much," Discussion Papers 05-20, University of Copenhagen. Department of Economics.
    16. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
    17. Alexander L. Wolman, 1999. "Sticky prices, marginal cost, and the behavior of inflation," Economic Quarterly, Federal Reserve Bank of Richmond, issue Fall, pages 29-48.
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