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Abstract:

cover
CEP Discussion Paper
Intrinsic Inflation Persistence
Kevin D. Sheedy
November 2007
Paper No' CEPDP0837:
Full Paper (pdf)

JEL Classification: E3


Tags: inflation persistence; hazard function; time-dependent pricing; new keynesian phillips curve

It is often argued that the New Keynesian Phillips curve is at odds with the data because it cannot explain inflation persistence — the difficulty of returning inflation immediately to target after a shock without any loss of output. This paper explains how a model where newer prices are stickier than older prices is consistent with this phenomenon, even though it introduces no deviation from optimizing, forwards-looking price setting. The probability of adjusting new and old prices is estimated using a novel method that draws only on macroeconomic data, and the findings strongly support the premise of the model.