Inflation Persistence

Jeffrey Fuhrer and George Moore

The Quarterly Journal of Economics, 1995, vol. 110, issue 1, 127-159

Abstract: This paper demonstrates that the behavior of the conventional Phelps-Taylor model of overlapping wage contracts stands in stark contrast with important features of U. S. macro data for inflation and output. In particular, the Phelps-Taylor specification implies far too little inflation persistence. We present a new contracting model, in which agents are concerned with relative real wages, that is data-consistent. In a specification that nests both models, we resoundingly reject the conventional contracting model, but cannot reject the new contracting model.

Date: 1995
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