Microfoundations of Inflation Persistence in the New Keynesian Phillips Curve

27 Pages Posted: 22 Mar 2015

See all articles by Marcelle Chauvet

Marcelle Chauvet

University of California Riverside

Insu Kim

University of California

Date Written: November 1, 2010

Abstract

This paper proposes a dynamic stochastic general equilibrium model that endoge­nously generates inflation persistence. We assume that although firms change prices periodically, they face convex costs that preclude optimal adjustment. In essence, the model assumes that price stickiness arises from both the frequency and size of price adjustments. The model is estimated using Bayesian techniques, and the results strongly support both sources of price stickiness in the U.S. data. In contrast with traditional sticky price models, the framework yields inflation inertia, a delayed effect of monetary policy shocks on inflation, and the observed "reverse dynamic" correlation between inflation and economic activity.

Keywords: inflation persistence, Phillips curve, sticky prices, convex costs

JEL Classification: E00, E31

Suggested Citation

Chauvet, Marcelle and Kim, Insu, Microfoundations of Inflation Persistence in the New Keynesian Phillips Curve (November 1, 2010). FRB Atlanta CQER Working Paper No. 10-05. Available at SSRN: https://ssrn.com/abstract=2583460 or http://dx.doi.org/10.2139/ssrn.2583460

Marcelle Chauvet (Contact Author)

University of California Riverside ( email )

900 University Avenue
4136 Sproul Hall
Riverside, CA 92521
United States
(951) 827-1587 (Phone)

HOME PAGE: http://https://sites.google.com/site/marcellechauvet/

Insu Kim

University of California ( email )

540 Alumni Ln
Davis, CA 95616
United States

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