A Phillips curve with an Ss foundation

Mark Gertler and John Leahy

No 06-8, Working Papers from Federal Reserve Bank of Philadelphia

Abstract: We develop an analytically tractable Phillips curve based on state-dependent pricing. We differ from the existing literature by considering a local approximation around a zero inflation steady state and introducing idiosyncratic shocks. The resulting Phillips curve is a simple variation of the conventional time-dependent Calvo formulation but with some important differences. First, the model is able to match the micro evidence on both the magnitude and timing of price adjustments. Second, holding constant the frequency of price adjustment, our state-dependent model exhibits greater flexibility in the aggregate price level than does the time-dependent model. On the other hand, with real rigidities present, our state-dependent pricing framework can exhibit considerable nominal stickiness, of the same order of magnitude suggested by a conventional time-dependent model.

Keywords: Phillips; curve (search for similar items in EconPapers)
Date: 2006
New Economics Papers: this item is included in nep-mac
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Working Paper: A Phillips Curve with an Ss Foundation (2006)
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