Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/3308
Authors: 
Karanassou, Marika
Snower, Dennis J.
Year of Publication: 
2004
Series/Report no.: 
Working paper series, Department of Economics, Queen Mary College, London 518
Abstract: 
It is commonly asserted that inflation is a jump variable in the New Keynesian Phillips curve, and thus wage-price inertia does not imply inflation inertia. We show that this "inflation flexibility proposition" is highly misleading, relying on the assumption that real variables are exogenous. In a general equilibrium setting (in which real variables not only affect inflation, but are also influenced by it) the phenomenon of inflation inertia re-emerges. Under plausible parameter values, high degrees of inflation persistence (prolonged after-effects of inflation in response to temporary money growth shocks) and under-responsiveness (prolonged effects in response to permanent shocks) can arise in the context of standard wage-price staggering models.
Subjects: 
Inflation persistence
Wage-price staggering
New Keynesian Phillips curve
Nominal inertia
Monetary policy
Forward-looking expectations
JEL: 
E31
E63
E42
E32
Document Type: 
Working Paper

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