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The Phillips Curve and a Micro-foundation of Trend Inflation

  • Harashima, Taiji

The hybrid New Keynesian Phillips curve has been criticized for lacking a micro-foundation. In this paper, an alternative purely forward-looking model of the Phillips curve is constructed on the basis of a micro-foundation of trend inflation. In addition, another source of output gaps other than frictions―a Nash equilibrium of a Pareto inefficient path―is considered. The model indicates that the role of frictions has been overestimated and that frictions are less important than previously have been thought. The conventional monetary policy of utilizing frictions cannot necessarily stabilize inflation. In contrast, the monetary policy of controlling the government’s preference is very effective. A problem is that the effects of both types of monetary policy are not distinguishable.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 51305.

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Date of creation: 08 Nov 2013
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Handle: RePEc:pra:mprapa:51305
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  2. Svensson, Lars E O & Woodford, Michael, 2004. "Implementing Optimal Policy Through Inflation-Forecast Targeting," CEPR Discussion Papers 4229, C.E.P.R. Discussion Papers.
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  7. Taiji Harashima, 2004. "A More Realistic Endogenous Time Preference Model and the Slump in Japan," Macroeconomics 0402015, EconWPA, revised 09 Feb 2004.
  8. Taiji Harashima, 2005. "The Cause of the Great Inflation: Interactions between the Government and the Monetary Policymakers," Macroeconomics 0510026, EconWPA, revised 31 Oct 2005.
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  10. Fuhrer, Jeffrey, 2006. "Intrinsic and Inherited Inflation Persistence," MPRA Paper 805, University Library of Munich, Germany.
  11. Harashima, Taiji, 2008. "A Microfounded Mechanism of Observed Substantial Inflation Persistence," MPRA Paper 10668, University Library of Munich, Germany.
  12. Lawrance, Emily C, 1991. "Poverty and the Rate of Time Preference: Evidence from Panel Data," Journal of Political Economy, University of Chicago Press, vol. 99(1), pages 54-77, February.
  13. Hasan Bakhshi & Pablo Burriel-Llombart, 2003. "Endogenous Price Stickiness, Trend Inflation, and the New Keynesian Phillips Curve," Computing in Economics and Finance 2003 12, Society for Computational Economics.
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  20. Gali, Jordi & Gertler, Mark & David Lopez-Salido, J., 2005. "Robustness of the estimates of the hybrid New Keynesian Phillips curve," Journal of Monetary Economics, Elsevier, vol. 52(6), pages 1107-1118, September.
  21. James H. Stock & Mark W. Watson, 2006. "Why Has U.S. Inflation Become Harder to Forecast?," NBER Working Papers 12324, National Bureau of Economic Research, Inc.
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  24. Harashima, Taiji, 2007. "The Optimal Quantity of Money Consistent with Positive Nominal Interest Rates," MPRA Paper 1839, University Library of Munich, Germany, revised 19 Feb 2007.
  25. Harashima, Taiji, 2007. "Hyperinflation, disinflation, deflation, etc.: A unified and micro-founded explanation for inflation," MPRA Paper 3836, University Library of Munich, Germany.
  26. Harashima, Taiji, 2011. "A Mechanism of Cyclical Volatility in the Vacancy-Unemployment Ratio: What Is the Source of Rigidity?," MPRA Paper 32476, University Library of Munich, Germany.
  27. Leeper, Eric M., 1991. "Equilibria under 'active' and 'passive' monetary and fiscal policies," Journal of Monetary Economics, Elsevier, vol. 27(1), pages 129-147, February.
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