Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/60678 
Year of Publication: 
2006
Series/Report no.: 
Staff Report No. 270
Publisher: 
Federal Reserve Bank of New York, New York, NY
Abstract: 
The New Keynesian Phillips curve (NKPC) asserts that inflation depends on expectationsof real marginal costs, but empirical research has shown that purely forward-looking versions of the model generate too little inflation persistence. In this paper, we offer a resolution of the persistence problem. We hypothesize that inflation is highly persistent because of drift in trend inflation, a feature that many versions of the NKPC neglect. We derive a version of the NKPC as a log-linear approximation around a time-varying inflation trend and examine whether it explains deviations of inflation from that trend. We estimate the NKPC parameters jointly with those that define the inflation trend by estimating a vector autoregression with drifting coefficients and volatilities; the autoregressive parameters are constrained to satisfy the restrictions imposed by the NKPC. Our results suggest that trend inflation has been historically quite volatile and that a purely forward-looking model that takes these fluctuations into account approximates well the short-run dynamics of inflation.
Subjects: 
inflation persistence, Phillips curve, time-varying VAR
JEL: 
E31
Document Type: 
Working Paper

Files in This Item:
File
Size
384.84 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.