Trend Inflation, Indexation, and Inflation Persistence in the New Keynesian Phillips Curve

American Economic Review · 2008 · Volume 98 · Issue 5

Abstract

Purely forward-looking versions of the New Keynesian Phillips curve (NKPC) generate too little inflation persistence. Some authors add ad hoc backwardlooking terms to address this shortcoming. We hypothesize that inflation persistence results mainly from variation in the long-run trend component of inflation, which we attribute to shifts in monetary policy. We derive a version of the NKPC that incorporates a time-varying inflation trend and examine whether it explains the dynamics of inflation. When drift in trend inflation is taken into account, a purely forward-looking version of the model fits the data well, and there is no need for backward-looking components. (JEL E12, E31, E52)

Keywords

General Aggregative Models: Keynes, Keynesian, Post-Keynesian, Price Level, Inflation, Deflation, Monetary Policy

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