Keywords: Inflation, Phillips curve
Abstract: The canonical inflation specification in sticky-price rational expectations models (the
new-Keynesian Phillips curve) is often criticized on the grounds that it fails to account
for the dependence of inflation on its own lags. In response, many recent studies have
employed a "hybrid" sticky-price specification in which inflation depends on a weighted
average of lagged and expected future values of itself, in addition to a driving variable
such as the output gap. In this paper, we consider some simple tests of the hybrid model
that are derived from the model's closed-form solution. Our results suggest that the
hybrid model provides a poor description of empirical inflation dynamics, and that there is
little evidence of the type of rational forward-looking behavior implied by the model.
Full paper (299 KB PDF)
Home | FEDS | List of 2003 FEDS papers
To comment on this site, please fill out our feedback form.
Last update: September 22, 2003