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A Theory of Intrinsic Inflation Persistence

Takushi Kurozumi () and Willem Van Zandweghe ()

No 201916, Working Papers from Federal Reserve Bank of Cleveland

Abstract: We propose a novel theory of intrinsic inflation persistence by introducing trend inflation and variable elasticity of demand in a model with staggered price and wage setting. Under nonzero trend inflation, the variable elasticity generates intrinsic persistence in inflation through a measure of price dispersion stemming from staggered price setting. It also introduces intrinsic persistence in wage inflation under staggered wage setting, which affects price inflation. With the theory we show that inflation exhibits a persistent, hump-shaped response to a monetary policy shock. We also show that a credible disinflation leads to a gradual decline in inflation and a fall in output, and lower trend inflation reduces inflation persistence, as observed around the time of the Volcker disinflation.

Keywords: intrinsic inflation persistence; variable elasticity of demand; Trend inflation; credible disinflation; price dispersion (search for similar items in EconPapers)
JEL-codes: E31 E52 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2019-08-29
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac, nep-mon and nep-ore
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedcwq:191600

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DOI: 10.26509/frbc-wp-201916

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