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Adjustment Cost-Driven Inflation Inertia

  • Sebastian Sienknecht

    ()

    (Department of Economics, Friedrich-Schiller-University Jena)

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    This paper shows how endogeneous inflation inertia is generated by a simple modificaton of the quadratic adjustment cost structure faced by economic agents. We derive the pertinent inflation relationships based on purely nominal rigidities and show that they always involve additional expectation terms which are absent in a Calvo-type environment. However, the structural differences do not prevent dynamic adjustment paths and theoretical moments to be similar under both rigidity assumptions. An extensive application of nominal adjustment frictions leads to a full-scale macroeconomic framework able to replicate empirical responses to an interest rate shock.

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    File URL: http://www.wiwi.uni-jena.de/Papers/jerp2010/wp_2010_023.pdf
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    Paper provided by Friedrich-Schiller-University Jena in its series Jena Economic Research Papers with number 2010-023.

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    Date of creation: 26 Mar 2010
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    Handle: RePEc:jrp:jrpwrp:2010-023
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    1. Jordi Galí & Mark Gertler & J. David López-Salido, 2000. "European Inflation Dynamics," Working Papers 0020, Banco de España;Working Papers Homepage.
    2. Hülsewig, Oliver & Mayer, Eric & Wollmershäuser, Timo, 2009. "Bank behavior, incomplete interest rate pass-through, and the cost channel of monetary policy transmission," Economic Modelling, Elsevier, vol. 26(6), pages 1310-1327, November.
    3. Carletti, Elena & Hartmann, Philipp & Spagnolo, Giancarlo, 2003. "Bank mergers, competition and liquidity," Working Paper Series 0292, European Central Bank.
    4. Xavier Freixas & Bruno Parigi & Jean-Charles Rochet, 2000. "Systemic risk, interbank relations, and liquidity provision by the central bank," Proceedings, Federal Reserve Bank of Cleveland, pages 611-640.
    5. Faia, Ester, 2006. "Optimal monetary policy rules with labor market frictions," Working Paper Series 0698, European Central Bank.
    6. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 2001. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," NBER Working Papers 8403, National Bureau of Economic Research, Inc.
    7. Ascari, Guido & Merkl, Christian, 2007. "Real Wage Rigidities and the Cost of Disinflations," IZA Discussion Papers 3049, Institute for the Study of Labor (IZA).
    8. Steffen Henzel & Oliver Hülsewig & Eric Mayer & Timo Wollmershäuser, 2007. "The Price Puzzle Revisited: Can the Cost Channel Explain a Rise in Inflation after a Monetary Policy Shock?," CESifo Working Paper Series 2039, CESifo Group Munich.
    9. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
    10. Hairault, Jean-Olivier & Portier, Franck, 1993. "Money, New-Keynesian macroeconomics and the business cycle," European Economic Review, Elsevier, vol. 37(8), pages 1533-1568, December.
    11. Martin Uribe & Stephanie Schmitt-Grohe, 2001. "Optimal fiscal and monetary policy under sticky prices," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.
    12. Julio J. Rotemberg, 1982. "Monopolistic Price Adjustment and Aggregate Output," Review of Economic Studies, Oxford University Press, vol. 49(4), pages 517-531.
    13. Miguel Casares, 2007. "Monetary Policy Rules in a New Keynesian Euro Area Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(4), pages 875-900, 06.
    14. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
    15. Jeff Fuhrer & George Moore, 1995. "Inflation Persistence," The Quarterly Journal of Economics, Oxford University Press, vol. 110(1), pages 127-159.
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