The Phillips Curve Under State-Dependent Pricing
Barbara Rudolf () and
No 68, Computing in Economics and Finance 2005 from Society for Computational Economics
This paper is related to a large recent literature studying the Phillips curve in sticky-price equilibrium models. It differs in allowing for the degree of price stickiness to be determined endogenously. A closed-form solution for short-term inflation is derived from the dynamic stochastic general equilibrium (DSGE) model with state-dependent pricing originally developed by Dotsey, King and Wolman. This generalised Phillips curve encompasses the New Keynesian Phillips curve (NKPC) based on Calvo-type price-setting as a special case. It describes current inflation as a function of lagged inflation, expected future inflation, and current and expected future real marginal costs. The paper demonstrates that inflation dynamics generated by the model for a broad class of time and state-dependent price-setting behaviours are well approximated by the popular hybrid NKPC (with one lag of inflation) in a low-inflation environment. This provides an explanation of why the hybrid NKPC performs well in describing inflation dynamics across industrial countries. It implies, however, that the reduced-form coefficients of the hybrid NKPC may not have a structural interpretation
Keywords: State-dependent pricing; inflation dynamics; Phillips curve. (search for similar items in EconPapers)
JEL-codes: E31 E32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac
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Journal Article: The Phillips curve under state-dependent pricing (2007)
Working Paper: The Phillips Curve Under State-Dependent Pricing (2006)
Working Paper: The Phillips curve under state-dependent pricing (2005)
Working Paper: The Phillips curve under state-dependent pricing (2004)
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