Arbeitspapier

Intrinsic and inherited inflation persistence

In the now conventional view of the inflation process, the New Keynesian Phillips Curve (NKPC) captures most of the persistence in inflation. The sources of persistence are twofold. First, the driving process for inflation-the output gap or, more commonly, real marginal cost-is itself quite persistent, and a casual inspection of the NKPC reveals that inflation must inherit this persistence. Second, a modest amount of backward?looking or indexing behavior imparts some intrinsic persistence to inflation. This latter source is generally thought to be of less importance than the former, as the degree of autocorrelation in the driving processes is substantial. This paper shows that in practice inflation in the NKPC inherits very little of the persistence of the driving process, and, contrary to conventional wisdom, it is intrinsic persistence that constitutes the dominant source of persistence. The paper explores the reasons for this and links them to two empirical observations. First, it has been difficult to develop a sizable coefficient on the driving process in NKPCs. Second, the shock that enters the NKPC, while often difficult to motivate economically, is large and is critical in distinguishing the sources of inflation persistence. While these observations help to clarify the behavior of inflation in NKPCs, they raise other fundamental questions about how to model inflation.

Sprache
Englisch

Erschienen in
Series: Working Papers ; No. 05-8

Klassifikation
Wirtschaft
Price Level; Inflation; Deflation
Monetary Policy

Ereignis
Geistige Schöpfung
(wer)
Fuhrer, Jeff
Ereignis
Veröffentlichung
(wer)
Federal Reserve Bank of Boston
(wo)
Boston, MA
(wann)
2005

Handle
Letzte Aktualisierung
20.09.2024, 08:24 MESZ

Datenpartner

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Objekttyp

  • Arbeitspapier

Beteiligte

  • Fuhrer, Jeff
  • Federal Reserve Bank of Boston

Entstanden

  • 2005

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