We are grateful to two anonymous referees and an editor (Pok-sang Lam) for excellent comments and insightful suggestions. The paper was given at the 10th International Conference on Macroeconomic Analysis and Finance at Crete (2005) and the 40th Konstanz seminar on Monetary Theory and Policy (2009). We would like to thank Filippo Altissimo, Harris Dellas, Dale Henderson, Eric Leeper, Stefan Nieman, Frank Smets, Raf Wouters, and seminar participants at Cardiff, Manchester, Nottingham, and the National University of Singapore for their comments. Part of this paper was completed while Engin Kara was visiting the Monetary Policy Strategy Division at the European Central Bank and he thanks them for their hospitality. This paper is a revised version of “Understanding Inflation Persistence: A Comparison of Different Models,” ECB Working Paper 672 (2006). Faults remain our own.
Can We Explain Inflation Persistence in a Way that Is Consistent with the Microevidence on Nominal Rigidity?
Article first published online: 28 DEC 2009
© 2010 The Ohio State University
Journal of Money, Credit and Banking
Volume 42, Issue 1, pages 151–170, February 2010
How to Cite
DIXON, H. and KARA, E. (2010), Can We Explain Inflation Persistence in a Way that Is Consistent with the Microevidence on Nominal Rigidity?. Journal of Money, Credit and Banking, 42: 151–170. doi: 10.1111/j.1538-4616.2009.00282.x
- Issue published online: 28 DEC 2009
- Article first published online: 28 DEC 2009
- Received August 14, 2006; and accepted in revised form August 28, 2009.
- DSGE models;
This paper adopts the impulse-response methodology to understand inflation persistence. It has often been argued that existing models of pricing fail to explain the persistence that we observe. We adopt a common general framework that allows for an explicit modeling of the distribution of contract lengths and for different types of price setting. We also evaluate how far the theories are consistent with recent evidence on price and wage rigidity. We find that allowing for a distribution of durations can take us a long way to solving the puzzle of inflation persistence, but not all the way yet.