Premium
Can We Explain Inflation Persistence in a Way that Is Consistent with the Microevidence on Nominal Rigidity?
Author(s) -
DIXON HUW,
KARA ENGIN
Publication year - 2010
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.1538-4616.2009.00282.x
Subject(s) - persistence (discontinuity) , rigidity (electromagnetism) , economics , econometrics , inflation (cosmology) , wage , impulse (physics) , keynesian economics , mathematical economics , theoretical physics , labour economics , physics , engineering , classical mechanics , geotechnical engineering , quantum mechanics
This paper adopts the impulse‐response methodology to understand inflation persistence. It has often been argued that existing models of pricing fail to explain the persistence that we observe. We adopt a common general framework that allows for an explicit modeling of the distribution of contract lengths and for different types of price setting. We also evaluate how far the theories are consistent with recent evidence on price and wage rigidity. We find that allowing for a distribution of durations can take us a long way to solving the puzzle of inflation persistence, but not all the way yet.