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 language | English (US) |
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Pages (from-to) | 2101-2126 |
Number of pages | 26 |
Journal | American Economic Review |
Volume | 98 |
Issue number | 5 |
DOIs | |
State | Published - Dec 2008 |
ASJC Scopus subject areas
- Economics and Econometrics