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New Keynesian Explanations of Cyclical Movements in Aggregate Inflation and Regional Inflation Differentials

Matthew Canzoneri (), Robert Cumby (), Behzad Diba () and Olena Mykhaylova ()
Authors registered in the RePEc Author Service: Olena Staveley-O'Carroll ()

Open Economies Review, 2006, vol. 17, issue 1, 27-55

Abstract: What determines the cyclical behavior of aggregate inflation and regional inflation differentials? The answer has strong implications for monetary policy and in Europe for the Stability and Growth Pact. In the United States, inflation rates move pro-cyclically, and across the Euro Area, inflation differentials are positively correlated with growth differentials. This suggests that demand shocks are the primary determinants of the cyclical behavior of aggregate inflation and regional inflation differentials. In this paper, we discuss New Keynesian explanations of these correlations, and we argue that demand shocks are either missing or inadequately modeled in the in typical New Keynesian model. Copyright Springer Science + Business Media, Inc. 2006

Keywords: inflation; inflation differentials; NNS models (search for similar items in EconPapers)
Date: 2006
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DOI: 10.1007/s11079-006-5213-2

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