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Simple Pricing Rules, the Phillips Curve and the Microfoundations of Inflation Persistence

Richard Mash ()

No 427, Computing in Economics and Finance 2005 from Society for Computational Economics

Abstract: We analyze the microfoundations of the Phillips curve, a key relationship in general macroeconomics and models of monetary policy in particular. The form in current widespread use includes both forward looking expected inflation and lagged inflation. The presence of lagged inflation is necessary to generate predicted inflation persistence to match actual persistence in real world data but it has proved very difficult to microfound. Recent contributions from Christiano, Eichenbaum and Evans (JPE, 2005) and Gali and Gertler (JME, 1999) have attempted to provide such microfoundations through the assumption of indexing or rule of thumb behaviour. We question the nature of the indexing rules or rules of thumb assumed and re-derive these models for the case where firms choose constrained optimal simple pricing rules. We find that the models no longer convincingly predict inflation persistence

Keywords: Monetary policy; Phillips curve; Inflation persistence; Microfoundations (search for similar items in EconPapers)
JEL-codes: E22 E52 E58 (search for similar items in EconPapers)
Date: 2005-11-11
New Economics Papers: this item is included in nep-mac and nep-mon
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Working Paper: Simple Pricing Rules, the Phillips Curve and the Microfoundations of Inflation Persistence (2007) Downloads
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