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PRICING POLICIES AND INFLATION DYNAMICS

Published online by Cambridge University Press:  22 June 2011

Luis Felipe Cespedes ,
Michael Kumhof  and
Eric Parrado
Luis Felipe Cespedes
Affiliation:
Universidade Adolfo Ibáñez
Michael Kumhof*
Affiliation:
International Monetary Fund
Eric Parrado
Affiliation:
Universidad Adolfo Ibáñez
*
Address correspondence to: Michael Kumhof, International Monetary Fund, Washington, DC 20431, USA; e-mail: [email protected].
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Abstract

The paper proposes a New Keynesian monetary model where firms' pricing policies feature a forward-looking optimal choice of the rate of price growth. The model can be thought of as a reduced form model of rational inattention that has only one additional state variable relative to the Calvo model [Journal of Monetary Economics 12 (1983), 383–398]. Like the model of backward-looking automatic indexation to past aggregate inflation, it generates a gradual and persistent reaction of the inflation rate, and output losses, following highly persistent monetary shocks. But unlike that model, its price setters behave very similarly to Calvo price setters when shocks are transitory.

Keywords

Inflation InertiaInflation PersistencePrice Setting
Type
Articles
Information
Macroeconomic Dynamics , Volume 16 , Issue 4 , September 2012 , pp. 576 - 604
Copyright
Copyright © Cambridge University Press 2011

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