American Economic Review Vol. 96 No. 1 2006

Can Rational Expectations Sticky-Price Models Explain Inflation Dynamics?

Jeremy Rudd¹; Karl Whelan²

¹ Division of Research and Statistics, Board of Governors of the Federal Reserve System, 20th and C Streets NW, Mailstop 80, Washington, DC 20551-0001. · ² Department of Economic Analysis, Research, and Publications, Central Bank and Financial Services Authority of Ireland, Dame Street, Dublin 2, Ireland.

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.

DOI

10.1257/000282806776157560

Volume

96

Issue

1

Pages

303-320

Language

en

Sources

bibtex:phds-export.bib crossref openalex

Cite

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