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Inflation and Money: A Puzzle

FRB St. Louis Working Paper No. 2005-076A

36 Pages Posted: 6 Jan 2006  

Pengfei Wang

HKUST, Department of Economics; Hong Kong University of Science & Technology (HKUST) - Department of Economics

Yi Wen

Federal Reserve Bank of St. Louis - Research Department; Tsinghua University

Date Written: December 2005

Abstract

We document that persistent and lagged inflation (with respect to output) is a worldwide phenomenon in that these short-run inflation dynamics are highly synchronized across countries. We investigate whether standard monetary models are consistent with the empirical facts. We find that neither the new Keynesian sticky-price model nor the Mankiw-Reis (QJE 2002) sticky-information model can explain the international synchronization of the short-run inflation dynamics. Although the sticky-information model of Mankiw and Reis is very successful in explaining the persistent and lagged inflation dynamics for each individual country, its open-economy analogue fails to explain the synchronization of the inflation dynamics among the countries using calibrated international covariance of monetary shocks. The reason is that the dynamic effects of monetary shocks on inflation in one country cannot be effectively propagated across and preserved in other countries. We conclude that the short-run inflation dynamics and their global synchronization cannot be a monetary phenomenon, but may be instead the consequence of non-monetary shocks. An independent contribution of the paper is to provide a simple solution technique for solving general equilibrium models with lagged expectations (e.g., due to sticky information).

Keywords: Sticky Information, Sticky Prices, Inflation Dynamics, Inflation Comovement, Money

JEL Classification: E31, E52

Suggested Citation

Wang, Pengfei and Wen, Yi, Inflation and Money: A Puzzle (December 2005). FRB St. Louis Working Paper No. 2005-076A. Available at SSRN: https://ssrn.com/abstract=874057 or http://dx.doi.org/10.2139/ssrn.874057

Pengfei Wang

HKUST, Department of Economics ( email )

Clearwater Bay
Kowloon, 999999
Hong Kong

Hong Kong University of Science & Technology (HKUST) - Department of Economics ( email )

Clear Water Bay
Kowloon, Hong Kong
China

Yi Wen (Contact Author)

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

411 Locust St
Saint Louis, MO 63011
United States
314-444-8559 (Phone)
314-444-8731 (Fax)

Tsinghua University ( email )

Beijing, 100084
China

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