A Phillips Curve with an Ss Foundation
New York University - Leonard N. Stern School of Business - Department of Economics; National Bureau of Economic Research (NBER)
John V. Leahy
New York University (NYU) - Department of Economics; National Bureau of Economic Research (NBER)
FRB of Philadelphia Working Paper Series No. 06-8
We develop an analytically tractable Phillips curve based on state-dependent pricing. We differ from the existing literature by considering a local approximation around a zero inflation steady state and introducing idiosyncratic shocks. The resulting Phillips curve is a simple variation of the conventional time-dependent Calvo formulation but with some important differences. First, the model is able to match the micro evidence on both the magnitude and timing of price adjustments. Second, holding constant the frequency of price adjustment, our state-dependent model exhibits greater flexibility in the aggregate price level than does the time-dependent model. On the other hand, with real rigidities present, our state-dependent pricing framework can exhibit considerable nominal stickiness, of the same order of magnitude suggested by a conventional time-dependent model.
Number of Pages in PDF File: 44
Keywords: Phillips curveworking papers series
Date posted: March 13, 2006
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo5 in 0.532 seconds