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Optimising Microfoundations for Inflation Persistence

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  • Richard Mash

    (Oxford University)

Abstract

We connect two major strands of the recent monetary policy literature, i) the search for well microfounded optimising models consistent with macroeconomic data, especially persistence in inflation, and ii) the wealth of newly available microeconomic data on price changing behaviour from the ECB’s Inflation Persistence Network, alongside earlier firm surveys for the US, UK and Sweden. We develop a fully optimising Phillips curve following Goodfriend and King (NBER Macro Annual,1997) that may be calibrated to virtually any time dependent pricing rule but extended to include cost push shocks and the aggregation of sectors with different pricing rules. Analytical results include a tendency for aggregate dynamics to be driven by “stickier†sectors. When calibrated to micro data the model predicts inflation persistence comparable to that in macro data with fully forward looking underlying pricing behaviour

Suggested Citation

  • Richard Mash, 2006. "Optimising Microfoundations for Inflation Persistence," Computing in Economics and Finance 2006 457, Society for Computational Economics.
  • Handle: RePEc:sce:scecfa:457
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    More about this item

    Keywords

    Monetary policy; Phillips curve; Inflation Persistence; Microfoundations;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity

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