Inflation Persistence and Flexible Prices
FRB of St. Louis Working Paper No. 2001-010D
Posted: 10 Nov 2003
Date Written: October 21, 2003
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: Suggested Citation