Optimising Microfoundations for Inflation Persistence.
Much recent monetary policy literature has searched for models suitable for policy analysis that are based on optimising microfoundations and consistent with the data, especially observed persistence of inflation and the output gap. Few models do well on both criteria. We derive an optimising Philli...
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| Format: | Working paper |
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Department of Economics (University of Oxford)
2004
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| Summary: | Much recent monetary policy literature has searched for models suitable for policy analysis that are based on optimising microfoundations and consistent with the data, especially observed persistence of inflation and the output gap. Few models do well on both criteria. We derive an optimising Phillips curve based on a much more general time dependent pricing rule than that underpinning current models and calibrate it using microeconomic evidence on price changing behaviour. The more general, calibrated pricing rule predicts inflation and output persistence comparable to that in the data without reliance on rule of thumb behaviour, indexing or serially correlated shocks. |
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