Extensive Price Margin and Inflation Persistence

24 Pages Posted: 8 Mar 2013

See all articles by Fang Yao

Fang Yao

Friedrich-Alexander University of Erlangen-Nürnberg

Date Written: January 26, 2013

Abstract

This paper provides an alternative explanation for the recent empirical evidence (Stock and Watson, 2007 and Cogley et al., 2010) showing that a random walk dynamic component accounts for much of the persistence in inflation. I use a time-dependent sticky price model and study the mapping from disturbances to the price reset hazard function to inflation dynamics. I show that shocks to the hazard function propagate the dynamics of the price distribution, which contains a unit root. Furthermore, I derive a principle for simple interest rate reaction rules to eliminate the unit root from the equilibrium dynamics of inflation.

Keywords: Infl‡ation Persistence, Unit Root, Price Reset Hazard Function, Monetary Policy Rule

JEL Classification: E12, E31

Suggested Citation

Yao, Fang, Extensive Price Margin and Inflation Persistence (January 26, 2013). Available at SSRN: https://ssrn.com/abstract=2229254 or http://dx.doi.org/10.2139/ssrn.2229254

Fang Yao (Contact Author)

Friedrich-Alexander University of Erlangen-Nürnberg ( email )

Schloßplatz 4
DE Bavaria 91054
Germany

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