Modelling inflation dynamics: a critical review of recent research

Jeremy Rudd and Karl Whelan ()

Open Access publications from School of Economics, University College Dublin

Abstract: In recent years, a broad academic consensus has arisen around the use of rational expectations sticky-price models to capture inflation dynamics. These models are seen as providing an empirically reasonable characterization of observed inflation behavior once suitable measures of the output gap are chosen; and, moreover, are perceived to be robust to the Lucas critique in a way that earlier econometric models of inflation are not. We review the principal conclusions of this literature concerning: 1) the ability of these models to fit the data; 2) the importance of rational forward-looking expectations in price setting; and 3) the appropriate measure of inflationary pressures. We argue that existing rational expectations sticky-price models fail to provide a useful empirical description of the inflation process, especially relative to traditional econometric Phillips curves of the sort commonly employed for policy analysis.

Keywords: Inflation (Finance)--Mathematical models; Rational expectations (Economic theory) (search for similar items in EconPapers)
Date: 2005-11
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Citations: View citations in EconPapers (46)

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http://hdl.handle.net/10197/237 Open Access version, 2005 (application/pdf)

Related works:
Journal Article: Modeling Inflation Dynamics: A Critical Review of Recent Research (2007)
Journal Article: Modeling Inflation Dynamics: A Critical Review of Recent Research (2007)
Working Paper: Modeling inflation dynamics: a critical review of recent research (2007)
Working Paper: Modelling Inflation Dynamics: A Critical Review of Recent Research (2005)
Working Paper: Modelling inflation dynamics: a critical review of recent research (2005)
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