Modelling inflation dynamics : a critical review of recent research

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Title: Modelling inflation dynamics : a critical review of recent research
Authors: Rudd, Jeremy
Whelan, Karl
Permanent link: http://hdl.handle.net/10197/237
Date: Nov-2005
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
Copyright (published version): 2005 Copyright Central Bank of Ireland
Subject LCSH: Inflation (Finance)--Mathematical models
Rational expectations (Economic theory)
Other versions: http://www.centralbank.ie/data/TechPaperFiles/7RT05.pdf
Language: en
Status of Item: Not peer reviewed
Appears in Collections:Economics Research Collection

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