Can rational expectations sticky-price models explain inflation dynamics?

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Title: Can rational expectations sticky-price models explain inflation dynamics?
Authors: Whelan, Karl
Rudd, Jeremy
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Date: Mar-2006
Online since: 2008-06-05T14:08:34Z
Abstract: The canonical inflation specification in sticky-price rational expectations models (the new-Keynesian Phillips curve) is often criticized for failing to account for the dependence of inflation on its own lags. In response, many studies employ a “hybrid” specification in which inflation depends on its lagged and expected future values, together with a driving variable such as the output gap. We consider some simple tests of the hybrid model that are derived from its closed form. We find that the hybrid model describes inflation dynamics poorly, and find little empirical evidence for the type of rational, forward-looking behavior that the model implies.
Type of material: Journal Article
Publisher: American Economic Association
Journal: American Economic Review
Volume: 96
Issue: 1
Start page: 303
End page: 320
Copyright (published version): Copyright of the American Economic Review is the Property of the American Economic Association 2006
Keywords: Inflation (Finance)Rational expectations (Economic theory)Economic policyPricing
Subject LCSH: Inflation (Finance)--Mathematical models
Rational expectations (Economic theory)--United States
Pricing--United States
DOI: 10.1257/000282806776157560
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Language: en
Status of Item: Peer reviewed
Appears in Collections:Economics Research Collection

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