Fair behavior and inflation persistence

Gerald Seidel

No 05-09, Papers from Sonderforschungsbreich 504

Abstract: In their seminal paper Fuhrer and Moore (1995) provide an explanation for the existence of inflation inertia. Driscoll and Holden (2003) argue that under more plausible assumptions the model of Fuhrer and Moore (1995) will coincide with the model of Taylor (1979) which can only explain sticky prices but not sticky inflation. Following the suggestions by Driscoll and Holden (2003) we extend their setting allowing for other-regarding preferences. It turns out that this new extended model is consistent with the one by Fuhrer and Moore (1995). This means that, even under the strong assumption of rational expectations, inflation is not only governed by its future expected but also by its past values. This is in line with empirical findings.

Keywords: inflation inertia; fairness; staggered contracts; inflation expectations; behavioral macroeconomics (search for similar items in EconPapers)
JEL-codes: D63 E31 Z13 (search for similar items in EconPapers)
Date: 2005
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