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Inflation Persistence Revisited

Author

Listed:
  • Marika Karanassou

    (Queen Mary, University of London)

  • Dennis J. Snower

    (Birkbeck, University of London)

Abstract

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.

Suggested Citation

  • Marika Karanassou & Dennis J. Snower, 2004. "Inflation Persistence Revisited," Working Papers 518, Queen Mary University of London, School of Economics and Finance.
    • Handle: RePEc:qmw:qmwecw:518
    as

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    File URL: https://www.qmul.ac.uk/sef/media/econ/research/workingpapers/2004/items/wp518.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Inflation persistence; Wage-price staggering; New Keynesian Phillips curve; Nominal inertia; Monetary policy; Forward-looking expectations;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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