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Erscheinungsjahr: 
2006
Schriftenreihe/Nr.: 
Staff Report No. 270
Verlag: 
Federal Reserve Bank of New York, New York, NY
Zusammenfassung: 
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.
Schlagwörter: 
inflation persistence, Phillips curve, time-varying VAR
JEL: 
E31
Dokumentart: 
Working Paper

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