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Modeling Inflation Dynamics: A Critical Review of Recent Research
Author(s) -
RUDD JEREMY,
WHELAN KARL
Publication year - 2007
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/j.1538-4616.2007.00019.x
Subject(s) - inflation (cosmology) , rational expectations , economics , principal (computer security) , dynamics (music) , econometrics , measure (data warehouse) , macroeconomics , computer science , psychology , theoretical physics , physics , pedagogy , database , operating system
In recent years, a broad academic consensus has arisen that favors using rational expectations sticky‐price models to capture inflation dynamics. We review the principal conclusions of this literature concerning: (1) the ability of these models to fit the data; (2) the importance of rational forward‐looking expectations in price setting; and (3) the appropriate measure of inflationary pressures. We argue that existing models fail to provide a useful empirical description of the inflation process.