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Price and wage inflation inertia under time-dependent adjustments

Author

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  • Di Bartolomeo Giovanni
  • Di Pietro Marco

Abstract

We derive and estimate a small-scale DSGE model augmented with price and wage adjustment governed by a time-dependent mechanisms. Byusing positively sloping hazard functions, we micro-found price and wage inflation intrinsic persistence, as we derive price and wage Phillips curves characterized by both forward and backward terms for inflation. Our estimation confirms upward-sloping hazard functions. Finally, we compare the empirical performance of our model to several popular alternatives based on di¤erent price and wage adjustment mechanisms, including Calvo pricing. By comparing log-marginal likelihoods of di¤erent estimations, we find that our model clearly outperforms these alternatives.

Suggested Citation

  • Di Bartolomeo Giovanni & Di Pietro Marco, 2013. "Price and wage inflation inertia under time-dependent adjustments," wp.comunite 0103, Department of Communication, University of Teramo.
  • Handle: RePEc:ter:wpaper:0103
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    File URL: http://wp.comunite.it/data/wp_no_103_2013.pdf
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    References listed on IDEAS

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    1. Michael Dotsey & Robert G. King & Alexander L. Wolman, 1999. "State-Dependent Pricing and the General Equilibrium Dynamics of Money and Output," The Quarterly Journal of Economics, Oxford University Press, vol. 114(2), pages 655-690.
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    6. Richard Mash, 2004. "Optimising Microfoundations for Inflation Persistence," Economics Series Working Papers 183, University of Oxford, Department of Economics.
    7. Mark Bils & Peter J. Klenow, 2004. "Some Evidence on the Importance of Sticky Prices," Journal of Political Economy, University of Chicago Press, vol. 112(5), pages 947-985, October.
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    More about this item

    Keywords

    time-dependent price/wage adjustments; Calvo pricing; intrinsic inflation inertia; hybrid Phiilips curves; model comparison;

    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
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General

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