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Can the New Keynesian Phillips Curve Explain Inflation Gap Persistence?

  • Fang Yao
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    Whelan (2007) found that the generalized Calvo-sticky-price model fails to replicate a typical feature of the empirical reduced-form Phillips curve - the positive dependence of inflation on its own lags. In this paper, I show that it is the 4-period-Taylor-contract hazard function he chose that gives rise to this result. In contrast, an empirically-based aggregate price reset hazard function can generate simulated data that are consistent with inflation gap persistence found in US CPI data. I conclude that a non-constant price reset hazard plays a crucial role for generating realistic inflation dynamics.

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    File URL: http://sfb649.wiwi.hu-berlin.de/papers/pdf/SFB649DP2010-030.pdf
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    Paper provided by Sonderforschungsbereich 649, Humboldt University, Berlin, Germany in its series SFB 649 Discussion Papers with number SFB649DP2010-030.

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    Length: 25 pages
    Date of creation: Jun 2010
    Date of revision:
    Handle: RePEc:hum:wpaper:sfb649dp2010-030
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    1. Coenen, Günter & Levin, Andrew T., 2004. "Identifying the influences of nominal and real rigidities in aggregate price-setting behavior," Working Paper Series 0418, European Central Bank.
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