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Endogenous Inflation - The Role of Expectations and Strategic Interaction

  • Seidel, Gerald

    ()

    (Sonderforschungsbereich 504)

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    Macroeconomic fluctuations always are the result of complex interactive processes. For this reason, our challenge of the widely used New Keynesian Phillips Curve builds on Taylor's (1979) version, which provides room for a richer sequential and interactive structure. We show that the Taylor model can be fruitfully complemented by the assumption of a �timeless� optimizing central bank. The macroeconomic equilibrium exhibits a significant degree of inflation inertia which is an endogenous economic result and not merely the consequence of exogenous persistence in aggregate real activity. This result is in stark contrast to earlier work by Kiley (2002) who found the New Keynesian Phillips curve to show more persistent reactions than its Taylor (1979) companion when being exposed to an exogenous monetary shocks.

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    Paper provided by Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim in its series Sonderforschungsbereich 504 Publications with number 05-14.

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    Length: 40 pages
    Date of creation: 30 Jan 2005
    Date of revision:
    Handle: RePEc:xrs:sfbmaa:05-14
    Note: I would like to thank Björn Frank, Oliver Kirchkamp, and Daniel Schunk for helpful comments.
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    1. Kiley, Michael T, 2002. "Partial Adjustment and Staggered Price Setting," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(2), pages 283-98, May.
    2. repec:cup:cbooks:9780521104609 is not listed on IDEAS
    3. Holden, Steinar & Driscoll, John C., 2003. "Coordination, Fair Treatment and Inflation Persistence," Memorandum 25/2002, Oslo University, Department of Economics.
    4. Steinar Holden & John C. Driscoll, 2003. "Inflation Persistence and Relative Contracting," American Economic Review, American Economic Association, vol. 93(4), pages 1369-1372, September.
    5. John M. Roberts, 1998. "Inflation expectations and the transmission of monetary policy," Finance and Economics Discussion Series 1998-43, Board of Governors of the Federal Reserve System (U.S.).
    6. Jensen, Christian & McCallum, Bennett T., 2002. "The non-optimality of proposed monetary policy rules under timeless perspective commitment," Economics Letters, Elsevier, vol. 77(2), pages 163-168, October.
    7. Roberts, John M., 1997. "Is inflation sticky?," Journal of Monetary Economics, Elsevier, vol. 39(2), pages 173-196, July.
    8. Amato, Jeffery D. & Laubach, Thomas, 2003. "Rule-of-thumb behaviour and monetary policy," European Economic Review, Elsevier, vol. 47(5), pages 791-831, October.
    9. Brayton, Flint & Levin, Andrew & Lyon, Ralph & Williams, John C., 1997. "The evolution of macro models at the Federal Reserve Board," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 47(1), pages 43-81, December.
    10. Vestin, David, 2000. "Price-level Targeting versus Inflation Targeting in a Forward-looking Model," Working Paper Series 106, Sveriges Riksbank (Central Bank of Sweden).
    11. F. Brayton & P. Tinsley, 1996. "A guide to FRB/US: a macroeconomic model of the United States," Finance and Economics Discussion Series 96-42, Board of Governors of the Federal Reserve System (U.S.).
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