A Note on Inflation Persistence

Steinar Holden and John Driscoll

No 8690, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Macroeconomists have for some time been aware that the New Keynesian Phillips curve, though highly popular in the literature, cannot explain the persistence observed in actual inflation. We argue that two of the more prominent alternative formulations, the Fuhrer and Moore (1995) relative contracting model and the Blanchard and Katz (1999) reservation wage conjecture, are highly problematic. Fuhrer and Moore (1995)'s formulation generates inflation persistence, but this is a consequence of their assuming that workers care about the past real wages of other workers. Making the more reasonable assumption that workers care about the current real wages of other workers, one obtains the standard formulation with no inflation persistence. The Blanchard and Katz conjecture turns out to imply that inflation depends negatively on itself lagged, i.e. the opposite of the empirical regularity.

JEL-codes: E3 E31 (search for similar items in EconPapers)
Date: 2001-12
New Economics Papers: this item is included in nep-mon
Note: ME
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Citations: View citations in EconPapers (2)

Published as Holden, Steinar and John C. Driscoll. "Inflation Persistence and Relative Contracting." The American Economic Review 93, 4 (Nov 2003): 1369-1372.

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