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Modelling inflation dynamics : a critical review of recent research
Author(s)
Date Issued
2005-11
Date Available
2008-06-12T14:35:56Z
Abstract
In recent years, a broad academic consensus has arisen around the use of rational expectations sticky-price models to capture inflation dynamics. These models are seen as providing an empirically reasonable characterization of observed inflation behavior once suitable measures of the output gap are chosen; and, moreover, are perceived to be robust to the Lucas critique in a way that earlier econometric models of inflation are not. We review the principal conclusions of this literature concerning: 1) the ability of these models to fit the data; 2) the importance of rational forward-looking expectations in price setting; and 3) the appropriate measure of inflationary pressures. We argue that existing rational expectations sticky-price models fail to provide a useful empirical description of the inflation process, especially relative to traditional econometric Phillips curves of the sort commonly employed for policy analysis.
Type of Material
Technical Report
Publisher
Central Bank of Ireland
Series
Central Bank of Ireland Research Technical Paper
7/RT/05
Copyright (Published Version)
2005 Copyright Central Bank of Ireland
Subject – LCSH
Inflation (Finance)--Mathematical models
Rational expectations (Economic theory)
Language
English
Status of Item
Not peer reviewed
This item is made available under a Creative Commons License
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