A Phillips Curve with an Ss Foundation

Mark Gertler and John Leahy

No 11971, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We develop an analytically tractable Phillips curve based on state-dependent pricing. We differ from the existing literature by considering a local approximation around a zero inflation steady state and introducing idiosyncratic shocks. The resulting Phillips curve is a simple variation of the conventional time-dependent Calvo formulation, but with some important differences. First, the model is able to match the micro evidence on both the magnitude and timing of price adjustments. Second, holding constant the frequency of price adjustment, our state-dependent model exhibits greater flexibility in the aggregate price level than does the time-dependent model. On the other hand, with real rigidities present, our state-dependent pricing framework can exhibit considerable nominal stickiness, of the same order by a conventional time-dependent model.

JEL-codes: E1 E3 (search for similar items in EconPapers)
Date: 2006-01
New Economics Papers: this item is included in nep-mac
Note: EFG ME
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Citations: View citations in EconPapers (36)

Published as Gertler, Mark and John Leahy. "A Phillips Curve with an Ss Foundation." Journal of Political Economy 116, 3 (2008).

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