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American Economic Review Vol. 98 No. 5 2008

Trend Inflation, Indexation, and Inflation Persistence in the New Keynesian Phillips Curve

Timothy Cogley1; Argia M. Sbordone2

1 Department of Economics, University of California-Davis, One Shields Ave., Davis, CA 95616. · 2 Research and Statistics Group, Federal Reserve Bank of New York, 33 Liberty St., New York, NY 10045.

Abstract

Purely forward-looking versions of the New Keynesian Phillips curve (NKPC) generate too little inflation persistence. Some authors add ad hoc backward-looking terms to address this shortcoming. We hypothesize that inflation persistence results mainly from variation in the long-run trend component of inflation, which we attribute to shifts in monetary policy. We derive a version of the NKPC that incorporates a time-varying inflation trend and examine whether it explains the dynamics of inflation. When drift in trend inflation is taken into account, a purely forward-looking version of the model fits the data well, and there is no need for backward-looking components.

DOI
10.1257/aer.98.5.2101
Volume
98
Issue
5
Pages
2101-2126
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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