Inflation Persistence and Relative Contracting

10 Pages Posted: 22 Sep 2003

See all articles by John C. Driscoll

John C. Driscoll

Federal Reserve Board

Steinar Holden

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

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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 one of the more prominent alternative formulations, the Fuhrer and Moore (1995) relative contracting model, is highly problematic. Fuhrer and Moore's 1995 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.

Keywords: Inflation persistence

JEL Classification: E31, E3, E5

Suggested Citation

Driscoll, John C. and Holden, Steinar, Inflation Persistence and Relative Contracting. FEDS Working Paper No. 2003-29. Available at SSRN: https://ssrn.com/abstract=436581 or http://dx.doi.org/10.2139/ssrn.436581

John C. Driscoll (Contact Author)

Federal Reserve Board ( email )

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Washington, DC 20551
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HOME PAGE: http://www.federalreserve.gov/econresdata/john-c-driscoll.htm

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 )

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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

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