Trend inflation, indexation, and inflation persistence in the new Keynesian Phillips curve

Timothy Cogley, Argia M. Sbordone

    Research output: Contribution to journalArticle

    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.

    Original languageEnglish (US)
    Pages (from-to)2101-2126
    Number of pages26
    JournalAmerican Economic Review
    Volume98
    Issue number5
    DOIs
    StatePublished - Dec 2008

    ASJC Scopus subject areas

    • Economics and Econometrics

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