Traditional Inflation Dynamics

Christopher Malikane

MPRA Paper from University Library of Munich, Germany

Abstract: We derive a traditional Phillips curve under the assumption that firms optimize their prices in the context where a fraction of their output is contracted on previous prices, and where they face potential losses and gains from such contracts. Our derivation delivers an augmented exact specification that is of an accelerationist type. Specifically, our baseline TPC features one lag of inflation and the labour share, two lags of the output gap and one lag of supply shocks. With rule-of-thumb behaviour considered, our traditional Phillips curve admits higher lags of these variables. We estimate these traditional Phillips curves for six developed and five emerging market economies and find that the degree of price rigidity is significant and has the correct sign. We conclude that this optimization-based traditional Phillips curve is a credible rival to its forward-looking new Keynesian counterpart.

Keywords: Traditional price Phillips curves; backward-looking behaviour (search for similar items in EconPapers)
JEL-codes: E31 (search for similar items in EconPapers)
Date: 2014-08-30
New Economics Papers: this item is included in nep-ias and nep-mac
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