Inflation Persistence, Inflation Targeting, and the Great Moderation

Abstract

There is growing evidence that the empirical Phillips curve within the US has changed significantly since the early 1980's. In particular, inflation persistence has declined sharply. The paper demonstrates that this decline is consistent with a standard Dynamic New Keynesian (DNK) model in which: (i) the variability of technology shocks has declined, and (ii) the central bank more aggressively responds to inflation.

Keywords: inflation persistence, Phillip's curve, mark-up shocks, inflation targeting

JEL Classification: E31, E37, E47