FRB St. Louis Working Paper No. 2005-076A
36 Pages Posted: 6 Jan 2006
Date Written: December 2005
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: 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