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Microfoundations of Inflation Persistence in the New Keynesian Phillips Curve

  • Marcelle, Chauvet
  • Insu, Kim

This paper proposes a dynamic stochastic general equilibrium model that endogenously generates inflation persistence. We assume that although firms change prices periodically, they face convex costs that preclude optimal adjustment. In essence, the model assumes that price stickiness arises from both the frequency and size of price adjustments. The model is estimated using Bayesian techniques and the results strongly support both sources of price stickiness in the U.S. data. In contrast with traditional sticky price models, the framework yields inflation inertia, delayed effect of monetary policy shocks on inflation, and the observed "reverse dynamic" correlation between inflation and economic activity.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 23109.

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Date of creation: May 2010
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Handle: RePEc:pra:mprapa:23109
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  11. Frank Smets & Raf Wouters, 2003. "An Estimated Dynamic Stochastic General Equilibrium Model of the Euro Area," Journal of the European Economic Association, MIT Press, vol. 1(5), pages 1123-1175, 09.
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  36. repec:nbr:nberre:0126 is not listed on IDEAS
  37. Fabiani, Silvia & Druant, Martine & Hernando, Ignacio & Kwapil, Claudia & Landau, Bettina & Loupias, Claire & Martins, Fernando & Matha, Thomas & Sabbatini, Roberto & Stahl, Harald & Stokman, Ad, 2006. "What Firms' Surveys Tell Us about Price-Setting Behavior in the Euro Area," MPRA Paper 808, University Library of Munich, Germany.
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