Inflation Persistence Revisited

Marika Karanassou and Dennis J. Snower
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Marika Karanassou: Queen Mary, University of London
Dennis J. Snower: Birkbeck, University of London

No 518, Working Papers from Queen Mary University of London, School of Economics and Finance

Abstract: It is commonly asserted that inflation is a jump variable in the New Keynesian Phillips curve, and thus wage-price inertia does not imply inflation inertia. We show that this "inflation flexibility proposition" is highly misleading, relying on the assumption that real variables are exogenous. In a general equilibrium setting (in which real variables not only affect inflation, but are also influenced by it) the phenomenon of inflation inertia re-emerges. Under plausible parameter values, high degrees of inflation persistence (prolonged after-effects of inflation in response to temporary money growth shocks) and under-responsiveness (prolonged effects in response to permanent shocks) can arise in the context of standard wage-price staggering models.

Keywords: Inflation persistence; Wage-price staggering; New Keynesian Phillips curve; Nominal inertia; Monetary policy; Forward-looking expectations (search for similar items in EconPapers)
JEL-codes: E31 E32 E42 E63 (search for similar items in EconPapers)
Date: 2004-09-01
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Persistent link: https://EconPapers.repec.org/RePEc:qmw:qmwecw:518

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