A Theory of Intrinsic Inflation Persistence

Takushi Kurozumi and Willem Van Zandweghe

Journal of Money, Credit and Banking, 2023, vol. 55, issue 8, 1961-2000

Abstract: We propose a novel theory of intrinsic inflation persistence by introducing trend inflation and Kimball (1995)‐type aggregators of individual differentiated goods and labor in a model with staggered price‐ and wage‐setting. Under nonzero trend inflation, the non‐CES (constant elasticity of substitution) aggregator of goods and staggered price‐setting give rise to a variable real marginal cost of goods aggregation, which becomes a driver of inflation. This marginal cost consists of an aggregate of the goods' relative prices, which depends on past inflation, thereby generating intrinsic inertia in inflation. Likewise, the non‐CES aggregator of labor and staggered wage‐setting lead to intrinsic inertia in wage inflation, which enhances the persistence of price inflation. With the theory we show that inflation exhibits a persistent, hump‐shaped response to monetary policy shocks. We also demonstrate that lower trend inflation reduces inflation persistence and that a credible disinflation leads to a gradual decline in inflation and a fall in output.

Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://doi.org/10.1111/jmcb.13066

Related works:
Working Paper: A Theory of Intrinsic Inflation Persistence (2023)
Working Paper: A Theory of Intrinsic Inflation Persistence (2019)
Working Paper: Price Dispersion and Inflation Persistence (2016)
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:wly:jmoncb:v:55:y:2023:i:8:p:1961-2000

Access Statistics for this article

Journal of Money, Credit and Banking is currently edited by Robert deYoung, Paul Evans, Pok-Sang Lam and Kenneth D. West

More articles in Journal of Money, Credit and Banking from Blackwell Publishing
Bibliographic data for series maintained by Wiley Content Delivery ().