Can Rational Expectations Sticky-Price Models Explain Inflation Dynamics

31 Pages Posted: 26 Nov 2003

See all articles by Jeremy B. Rudd

Jeremy B. Rudd

Board of Governors of the Federal Reserve System

Karl Whelan

Central Bank and Financial Services Authority of Ireland - Economic Analysis and Research Department

Date Written: September 3, 2003

Abstract

The canonical inflation specification in sticky-price rational expectations models (the new-Keynesian Phillips curve) is often criticized on the grounds that it fails to account for the dependence of inflation on its own lags. In response, many recent studies have employed a "hybrid" sticky-price specification in which inflation depends on a weighted average of lagged and expected future values of itself, in addition to a driving variable such as the output gap. In this paper, we consider some simple tests of the hybrid model that are derived from the model's closed-form solution. Our results suggest that the hybrid model provides a poor description of empirical inflation dynamics, and that there is little evidence of the type of rational forward-looking behavior implied by the model.

Keywords: Inflation, Phillips curve

JEL Classification: E31

Suggested Citation

Rudd, Jeremy B. and Whelan, Karl, Can Rational Expectations Sticky-Price Models Explain Inflation Dynamics (September 3, 2003). Available at SSRN: https://ssrn.com/abstract=461260 or http://dx.doi.org/10.2139/ssrn.461260

Jeremy B. Rudd (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
202-452-3780 (Phone)
202-452-3819 (Fax)

Karl Whelan

Central Bank and Financial Services Authority of Ireland - Economic Analysis and Research Department ( email )

Dame Street
P.O. Box 559
Dublin 2
Ireland

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
163
Abstract Views
1,194
rank
218,127
PlumX Metrics