EconPapers    
Economics at your fingertips  
 

Phillips curve and long-run inflation under commitment

Dario Pontiggia ()

Journal of Economic Studies, 2020, vol. 47, issue 1, 21-35

Abstract: Purpose - The purpose of this paper is to study the optimal long-run rate of inflation in the presence of a hybrid Phillips curve, which nests a purely backward-looking Phillips curve and the purely forward-looking New Keynesian Phillips curve (NKPC) as special limiting cases. Design/methodology/approach - This paper derives the long-run rate of inflation in a basic New Keynesian (NK) model, characterized by sticky prices and rule-of-thumb behavior by price setters. The monetary authority possesses commitment and its objective function stems from an approximation to the utility of the representative household. Findings - Commitment solution for the monetary authority leads to steady-state outcomes in which inflation, albeit small, is positive. Rising from zero under the purely forward-looking NKPC, the optimal long-run rate of inflation reaches its maximum under the purely backward-looking Phillips curve. In this case, inflation bias arises, while, under the hybrid Phillips curve, positive long-run inflation is associated with an output gain. Research limitations/implications - This paper serves as a clarification against the misperception that log-linearized models take as given the steady-state inflation rate rather than being capable of determining it. Analysis is sensitive to the basic NK setting, with the assumed rule-of-thumb behavior by price setters and price staggering. Originality/value - The results are the first to quantify the optimal long-run rate of inflation in a fully microfounded model that nests different Phillips curves.

Keywords: Inflation persistence; Phillips curve; Optimal monetary policy (search for similar items in EconPapers)
Date: 2020
References: Add references at CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
http://www.emeraldinsight.com/10.1108/JES-06-2018- ... RePEc&WT.mc_id=RePEc (text/html)
Access to full text is restricted to subscribers

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eme:jespps:jes-06-2018-0229

Ordering information: This journal article can be ordered from
Emerald Group Publishing, Howard House, Wagon Lane, Bingley, BD16 1WA, UK
http://www.emerald.com/jes.htm

Access Statistics for this article

Journal of Economic Studies is currently edited by Professor Mohsen Bahmani-Oskooee

More articles in Journal of Economic Studies from Emerald Group Publishing
Bibliographic data for series maintained by Virginia Chapman ().

 
Page updated 2022-09-02
Handle: RePEc:eme:jespps:jes-06-2018-0229