Traditional Inflation Dynamics

Malikane, Christopher (2014): Traditional Inflation Dynamics.

Abstract

We derive a traditional Phillips curve under the assumption that firms optimize their prices in the context where a fraction of their output is contracted on previous prices, and where they face potential losses and gains from such contracts. Our derivation delivers an augmented exact specification that is of an accelerationist type. Specifically, our baseline TPC features one lag of inflation and the labour share, two lags of the output gap and one lag of supply shocks. With rule-of-thumb behaviour considered, our traditional Phillips curve admits higher lags of these variables. We estimate these traditional Phillips curves for six developed and five emerging market economies and find that the degree of price rigidity is significant and has the correct sign. We conclude that this optimization-based traditional Phillips curve is a credible rival to its forward-looking new Keynesian counterpart.

• Item Type: MPRA Paper
• Language: English
• Keywords: Traditional price Phillips curves, backward-looking behaviour
• Subjects: E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation

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