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Inflation Persistence Revisited

  • Marika Karanassou

    (Queen Mary - University of London and IZA)

  • Dennis J Snower

    (Institute of World Economics IZA and CEPR)

It is commonly asserted that inflation is a jump variable in the New Keynesian Phillips curve, and thus wage-price inertia does not imply inflation inertia. We show that this "inflation flexibility proposition" is highly misleading, relying on the assumption that real variables are exogenous. In a general equilibrium setting (in which real variables not only affect inflation, but are also influenced by it) the phenomenon of inflation inertia re-emerges. Under plausible parameter values, high degrees of inflation persistence (prolonged after-effects of inflation in response to temporary money growth shocks) and under-responsiveness (prolonged effects in response to permanent shocks) can arise in the context of standard wage-price staggering models.

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Paper provided by Money Macro and Finance Research Group in its series Money Macro and Finance (MMF) Research Group Conference 2005 with number 50.

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Date of creation: 03 Sep 2005
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Handle: RePEc:mmf:mmfc05:50
Contact details of provider: Web page: http://www.essex.ac.uk/afm/mmf/index.html

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  1. Taylor, John B., 1980. "Output and price stability: An international comparison," Journal of Economic Dynamics and Control, Elsevier, vol. 2(1), pages 109-132, May.
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