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Can the New Keynesian Phillips Curve Explain Inflation Gap Persistence?

Fang Yao ()

No SFB649DP2010-030, SFB 649 Discussion Papers from Humboldt University, Collaborative Research Center 649

Abstract: Whelan (2007) found that the generalized Calvo-sticky-price model fails to replicate a typical feature of the empirical reduced-form Phillips curve - the positive dependence of inflation on its own lags. In this paper, I show that it is the 4-period-Taylor-contract hazard function he chose that gives rise to this result. In contrast, an empirically-based aggregate price reset hazard function can generate simulated data that are consistent with inflation gap persistence found in US CPI data. I conclude that a non-constant price reset hazard plays a crucial role for generating realistic inflation dynamics.

Keywords: Inflation gap persistence; Trend inflation; New Keynesian Phillips curve; Hazard function (search for similar items in EconPapers)
JEL-codes: E12 E31 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Date: 2010-06
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