Inflation Persistence and Flexible Prices

FRB of St. Louis Working Paper No. 2001-010D

Posted: 10 Nov 2003

See all articles by Robert Dittmar

Robert Dittmar

Citigroup, Inc. - CitiMortgage

William T. Gavin

Federal Reserve Bank of St. Louis - Research Division; University of Memphis Department of Economics

Finn Kydland

Carnegie Mellon University - David A. Tepper School of Business; Norwegian School of Economics (NHH) - Department of Economics

Date Written: October 21, 2003

Abstract

Inflation persistence in U.S. data can be characterized by a vector autocorrelation function relating inflation and deviations of output from trend. This paper shows that a flexible-price general equilibrium business cycle model with money and a central bank using an interest rate target can account for inflation persistence. There are no sticky prices and no liquidity effects. Agents' decisions in a period are taken only after all shocks are observed. Monetary policy induces inflation persistence by creating a persistent difference between the real and nominal interest rates.

Keywords: Inflation Persistence, Flexible Prices, Taylor Rule

JEL Classification: E31, E32, E42

Suggested Citation

Dittmar, Robert D. and Gavin, William T. and Kydland, Finn E., Inflation Persistence and Flexible Prices (October 21, 2003). FRB of St. Louis Working Paper No. 2001-010D, Available at SSRN: https://ssrn.com/abstract=281384

Robert D. Dittmar

Citigroup, Inc. - CitiMortgage ( email )

St. Louis, MO
United States

William T. Gavin (Contact Author)

Federal Reserve Bank of St. Louis - Research Division ( email )

441 Locust Street
P. O. Box 442
St. Louis, MO 63166
United States
314 873-8422 (Phone)

HOME PAGE: http://www.gavinecon.com

University of Memphis Department of Economics ( email )

Memphis, TN 38152
United States

Finn E. Kydland

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States
412 268-3691 (Phone)
412 268-7357 (Fax)

Norwegian School of Economics (NHH) - Department of Economics

Helleveien 30
N-5035 Bergen
Norway

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