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The Phillips curve under state-dependent pricing

Hasan Bakhshi, Hashmat Khan () and Barbara Rudolf ()

Bank of England working papers from Bank of England

Abstract: This paper is related to a large recent literature studying the Phillips curve in sticky-price equilibrium models. It differs in allowing for the degree of price stickiness to be determined endogenously. A closed-form solution for short-term inflation is derived from the dynamic stochastic general equilibrium (DSGE) model with state-dependent pricing originally developed by Dotsey, King and Wolman. This generalised Phillips curve encompasses the New Keynesian Phillips curve (NKPC) based on Calvo-type price-setting as a special case. It describes current inflation as a function of lagged inflation, expected future inflation, and current and expected future real marginal costs. The paper demonstrates that inflation dynamics generated by the model for a broad class of time and state-dependent price-setting behaviours are well approximated by the popular hybrid NKPC (with one lag of inflation) in a low-inflation environment. This provides an explanation of why the hybrid NKPC performs well in describing inflation dynamics across industrial countries. It implies, however, that the reduced-form coefficients of the hybrid NKPC may not have a structural interpretation.

Date: 2004-08
New Economics Papers: this item is included in nep-mac
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Related works:
Journal Article: The Phillips curve under state-dependent pricing (2007) Downloads
Working Paper: The Phillips Curve Under State-Dependent Pricing (2006) Downloads
Working Paper: The Phillips Curve Under State-Dependent Pricing (2005) Downloads
Working Paper: The Phillips curve under state-dependent pricing (2005) Downloads
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