Alternative Sources of the Lag Dynamics of Inflation

FRB Kansas City Research Working Paper No. 02-12

52 Pages Posted: 7 Feb 2005

See all articles by Sharon Kozicki

Sharon Kozicki

Bank of Canada

Peter A. Tinsley

George Washington University; Birkbeck College, Univ. of London

Date Written: December 2002

Abstract

This paper discusses four potential sources of lag dynamics in inflation: non-rational behavior, staggered contracting, frictions on price adjustment, and shifts in the long-run inflation anchor of agent expectations (the perceived inflation target). Expressions for inflation dynamics from structural models which admit these different sources of lag dynamics are contrasted. Empirical results are provided for the U.S. and Canada. The empirical evidence suggests that shifts in the perceived inflation target of monetary policy, less than full policy credibility, and inflation stickiness have all been important features of the historical behavior of inflation.

Keywords: Inflation persistence, policy credibility, Phillips curve, perceived inflation target, shifting endpoint, staggered contracts, adjustment costs

JEL Classification: E31, E52, D8

Suggested Citation

Kozicki, Sharon and Tinsley, Peter A., Alternative Sources of the Lag Dynamics of Inflation (December 2002). FRB Kansas City Research Working Paper No. 02-12, Available at SSRN: https://ssrn.com/abstract=469140 or http://dx.doi.org/10.2139/ssrn.469140

Sharon Kozicki (Contact Author)

Bank of Canada ( email )

234 Wellington Street
Ottawa, Ontario K1A 0G9
Canada

Peter A. Tinsley

George Washington University ( email )

710 21st Street NW
Washington, DC 20052
United States

Birkbeck College, Univ. of London

Malet Street
London, WC1E 7HX
United Kingdom