The Phillips curve under state-dependent pricing

Hasan Bakhshi (), Hashmat Khan () and Barbara Rudolf ()
Additional contact information
Hasan Bakhshi: Bank of England, http://www.bankofengland.co.uk/
Barbara Rudolf: Swiss National Bank, Postal: Boersenstrasse 15, P.O. Box, CH-8022 Zurich, http://www.snb.ch

No 2005-1, Working Papers from Swiss National Bank

Abstract: This paper is related to a large recent literature studying the Phillips curve in sticky-price equilibrium models. It differs in allowing for the degree of price stickiness to be determined endogenously. A closed-form solution for short-term inflation is derived from the dynamic stochastic general equilibrium (DSGE) model with state-dependent pricing originallydev eloped byDotsey , King and Wolman. This generalised Phillips curve encompasses the New Keynesian Phillips curve (NKPC) based on Calvo-type price-setting as a special case. It describes current inflation as a function of lagged inflation, expected future inflation, and current and expected future real marginal costs. The paper demonstrates that inflation dynamics generated bythe model for a broad class of time and state-dependent price-setting behaviours are well approximated bythe popular hybrid NKPC (with one lag of inflation) in a low-inflation environment. This provides an explanation of whythe hybrid NKPC performs well in describing inflation dynamics across industrial countries. It implies, however, that the reduced-form coefficients of the hybrid NKPC maynot have a structural interpretation.

Keywords: State-dependent pricing; inflation dynamics; Phillips curve (search for similar items in EconPapers)
JEL-codes: E31 E32 (search for similar items in EconPapers)
Date: Written 2005-01-01

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Related works:
Working Paper: The Phillips Curve Under State-Dependent Pricing (2006)
Working Paper: The Phillips curve under state-dependent pricing
Journal Article: The Phillips curve under state-dependent pricing (2007)
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