Inflation and Output Dynamics with State-Dependent Frequency of Price Changes

Kolver Hernandez
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Kolver Hernandez: Boston College

Macroeconomics from EconWPA

Abstract: This paper extends Calvo's (1983) time-dependent pricing model to incorporate state-dependent features in pricing, while preserving tractability. The pricing scheme delivers a generalized New Keynesian Phillips curve with an explicit role for the frequency of price revisions. The novel feature shows that inflation responds to movements of relative prices and to endogenous fluctuations in the average frequency of price adjustment. The model offers, therefore, a microfounded rationale for systematic deviations in the inflation- marginal cost relation predicted by the new Keynesian Phillips curve. As a byproduct, the model determines endogenously the short-run slope of the Phillips curve. Simulations predict weaker responses of output and stronger responses of inflation to technology, preference and monetary shocks than those of a close time-dependent model.

JEL-codes: E (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cmp and nep-mac
Date: Written 2004-11-28
Note: Type of Document - pdf
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