The Inflation Persistence of Staggered Contracts

36 Pages Posted: 1 May 2003

See all articles by Luca Guerrieri

Luca Guerrieri

Federal Reserve Board - Trade and Financial Studies

Date Written: August 2002

Abstract

One of the criticisms routinely advanced against models of the business cycle with staggered contracts is their inability to generate inflation persistence. This paper finds that staggered Taylor contracts are, in fact, capable of reproducing the inflation persistence implied by U.S. data. Following Fuhrer and Moore, I capture the moments that the contract specification needs to replicate by using the correlograms from a small vector autoregression (VAR) that includes inflation among the endogenous variables. A simple structural model substitutes the inflation equation from the VAR with the contract specification. I estimate the contract parameters in the structural model by maximum likelihood. The correlogram for the endogenous variables from the estimated structural model, including that for inflation, are very close to the correlograms from the VAR (and are contained within their 90% confidence intervals). By the same metric, where Taylor contracts do not fare well is in reproducing the cross-correlations between inflation and output.

Keywords: maximum likelihood, Phillips curve

JEL Classification: E0, E3

Suggested Citation

Guerrieri, Luca, The Inflation Persistence of Staggered Contracts (August 2002). FRB, Division of International Finance Discussion Paper No. 734. Available at SSRN: https://ssrn.com/abstract=327204 or http://dx.doi.org/10.2139/ssrn.327204

Luca Guerrieri (Contact Author)

Federal Reserve Board - Trade and Financial Studies ( email )

20th St. and Constitution Ave.
Washington, DC 20551
United States
202-452-2550 (Phone)

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