Abstract
We develop an analytically tractable Phillips curve based on state-dependent pricing. We consider a local approximation around a zero inflation steady state and introduce infrequent idiosyncratic shocks. The resulting Phillips curve is a simple variant of the conventional time-dependent Calvo formulation with important differences. First, the model is able to match the micro evidence on the magnitude and timing of price adjustments. Second, our state-dependent model exhibits greater flexibility in the aggregate price level than the time-dependent model. With real rigidities present, however, our model can exhibit nominal stickiness similar to a conventional time-dependent model.
Original language | English (US) |
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Pages (from-to) | 533-572 |
Number of pages | 40 |
Journal | Journal of Political Economy |
Volume | 116 |
Issue number | 3 |
DOIs | |
State | Published - Jun 2008 |
ASJC Scopus subject areas
- Economics and Econometrics