A Note on Inflation Persistence

14 Pages Posted: 20 Dec 2001 Last revised: 12 Dec 2009

See all articles by Steinar Holden

Steinar Holden

University of Oslo - Department of Economics; Norges Bank; CESifo (Center for Economic Studies and Ifo Institute)

John C. Driscoll

Federal Reserve Board

Date Written: December 2001

Abstract

Macroeconomists have for some time been aware that the New Keynesian Phillips curve, though highly popular in the literature, cannot explain the persistence observed in actual inflation. We argue that two of the more prominent alternative formulations, the Fuhrer and Moore (1995) relative contracting model and the Blanchard and Katz (1999) reservation wage conjecture, are highly problematic. Fuhrer and Moore (1995)'s formulation generates inflation persistence, but this is a consequence of their assuming that workers care about the past real wages of other workers. Making the more reasonable assumption that workers care about the current real wages of other workers, one obtains the standard formulation with no inflation persistence. The Blanchard and Katz conjecture turns out to imply that inflation depends negatively on itself lagged, i.e. the opposite of the empirical regularity.

Suggested Citation

Holden, Steinar and Driscoll, John C., A Note on Inflation Persistence (December 2001). NBER Working Paper No. w8690. Available at SSRN: https://ssrn.com/abstract=294739

Steinar Holden

University of Oslo - Department of Economics ( email )

P.O. Box 1095 Blindern
N-0317 Oslo
Norway
+47 22 85 51 56 (Phone)
+47 22 85 50 35 (Fax)

HOME PAGE: http://folk.uio.no/~sholden/

Norges Bank ( email )

P.O. Box 1179
Oslo, N-0107
Norway

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

John C. Driscoll (Contact Author)

Federal Reserve Board ( email )

20th and C Streets, NW
Washington, DC 20551
United States

HOME PAGE: http://www.federalreserve.gov/econresdata/john-c-driscoll.htm

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