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Inflation and Money: A Puzzle

Pengfei Wang

Hong Kong University of Science & Technology (HKUST)

Yi Wen

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

December 2005

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

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).

Number of Pages in PDF File: 36

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

JEL Classification: E31, E52

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Date posted: January 6, 2006  

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

Contact Information

Pengfei Wang
Hong Kong University of Science & Technology (HKUST) ( email )
Clearwater Bay
Hong Kong
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
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