Pricing Policies and Inflation Inertia

27 Pages Posted: 29 Jan 2006

See all articles by Luis Felipe Cespedes

Luis Felipe Cespedes

International Monetary Fund (IMF)

Michael Kumhof

Bank of England

Eric Parrado

Central Bank of Chile

Date Written: April 2003


This paper provides a monetary model with nominal rigidities that differs from the conventional New Keynesian model with firms setting pricing policies instead of price levels. In response to permanent or highly persistent monetary policy shocks this model generates the empirically observed slow (inertial) and prolonged (persistent) reaction of the inflation rate, and also the recession that typically accompanies moderate disinflations. The reason is that firms respond to such shocks mostly through a change in the long-run or inflation updating component of their pricing policies. With staggered pricing policies there is a time lag before this is reflected in aggregate inflation.

Keywords: Inflation inertia, disinflation, pricing policies

JEL Classification: E31, E52, F41

Suggested Citation

Cespedes, Luis Felipe and Kumhof, Michael and Parrado, Eric, Pricing Policies and Inflation Inertia (April 2003). IMF Working Paper, Vol. , pp. 1-27, 2003. Available at SSRN:

Luis Felipe Cespedes (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

Michael Kumhof

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Eric Parrado

Central Bank of Chile ( email )

Agustinas 1180

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