Fair Behavior and Inflation Persistence

Gerald Seidel ()
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Gerald Seidel: Sonderforschungsbereich 504, Postal: L 13, 15, D-68131 Mannheim

No 05-09, Sonderforschungsbereich 504 Publications from Sonderforschungsbereich 504, Universität Mannheim, Sonderforschungsbereich 504, University of Mannheim

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: D E Z13 (search for similar items in EconPapers)
Pages: 11 pages
Date: 2005-02-22
Note: I would like to thank Björn Frank and Oliver Kirchkamp for helpful comments. Financial support from the Deutsche Forschungsgemeinschaft, SFB 504, at the University of Mannheim, is gratefully acknowledged.
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