Inflation Persistence and Flexible Prices

17 Pages Posted: 4 Feb 2005

See all articles by Robert Dittmar

Robert Dittmar

Citigroup, Inc. - CitiMortgage

William T. Gavin

Federal Reserve Bank of St. Louis - Research Division; University of Memphis Department of Economics

Finn Kydland

Carnegie Mellon University - David A. Tepper School of Business; Norwegian School of Economics (NHH) - Department of Economics

Abstract

If the central bank follows an interest rate rule, then inflation is likely to be persistent, even when prices are fully flexible. Any shock, whether persistent or not, may lead to inflation persistence. In equilibrium, the dynamics of inflation are determined by the evolution of the spread between the real interest rate and the central bank's target. Inflation persistence can be characterized by a vector autocorrelation function relating inflation and output. This article shows that a flexible-price, general-equilibrium business cycle model with money and a central bank using an interest rate target can account for such inflation persistence.

Suggested Citation

Dittmar, Robert D. and Gavin, William T. and Kydland, Finn E., Inflation Persistence and Flexible Prices. Available at SSRN: https://ssrn.com/abstract=660660

Robert D. Dittmar

Citigroup, Inc. - CitiMortgage ( email )

St. Louis, MO
United States

William T. Gavin

Federal Reserve Bank of St. Louis - Research Division ( email )

441 Locust Street
P. O. Box 442
St. Louis, MO 63166
United States
314 873-8422 (Phone)

HOME PAGE: http://www.gavinecon.com

University of Memphis Department of Economics ( email )

Memphis, TN 38152
United States

Finn E. Kydland (Contact Author)

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States
412 268-3691 (Phone)
412 268-7357 (Fax)

Norwegian School of Economics (NHH) - Department of Economics

Helleveien 30
N-5035 Bergen
Norway

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