Can rational expectations sticky-price models explain inflation dynamics?

Karl Whelan () and Jeremy Rudd

Open Access publications from School of Economics, University College Dublin

Abstract: The canonical inflation specification in sticky-price rational expectations models (the new-Keynesian Phillips curve) is often criticized for failing to account for the dependence of inflation on its own lags. In response, many studies employ a “hybrid” specification in which inflation depends on its lagged and expected future values, together with a driving variable such as the output gap. We consider some simple tests of the hybrid model that are derived from its closed form. We find that the hybrid model describes inflation dynamics poorly, and find little empirical evidence for the type of rational, forward-looking behavior that the model implies.

Keywords: Inflation (Finance); Rational expectations (Economic theory); Economic policy; Pricing; Inflation (Finance)--Mathematical models; Rational expectations (Economic theory)--United States; Pricing--United States (search for similar items in EconPapers)
Pages: 18 pages
Date: 2006-03
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Citations: View citations in EconPapers (147)

Published in: American Economic Review, 96(1) 2006-03

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http://hdl.handle.net/10197/199 Open Access version, 2006 (application/pdf)

Related works:
Journal Article: Can Rational Expectations Sticky-Price Models Explain Inflation Dynamics? (2006)
Working Paper: Can Rational Expectations Sticky-Price Models Explain Inflation Dynamics (2003)
Working Paper: Can rational expectations sticky-price models explain inflation dynamics? (2003)
Working Paper: Can Rational Expectations Sticky-Price Models Explain Inflation Dynamics? (2003)
Working Paper: Can rational expectations sticky-price models explain inflation dynamics (2003)
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Persistent link: https://EconPapers.repec.org/RePEc:ucn:oapubs:10197/199

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