Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/60678
Authors: 
Cogley, Timothy
Sbordone, Argia M.
Year of Publication: 
2006
Series/Report no.: 
Staff Report, Federal Reserve Bank of New York 270
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

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