Modeling Inflation Dynamics: A Critical Review of Recent Research

By Jeremy B. Rudd, Karl Whelan. 2007

320 citations recorded by the source corpus.

In recent years, a broad academic consensus has arisen around the use of rational expectations sticky-price models to capture inflation dynamics. These models are seen as providing an empirically reasonable characterization of observed inflation behavior once suitable measures of the output gap are chosen; and, moreover, are perceived to be robust to the Lucas critique in a way that earlier econometric models of inflation are not. 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 rational expectations sticky-price models fail to provide a useful empirical description of the inflation process, especially relative to traditional econometric Phillips curves of the sort commonly employed for policy analysis and forecasting.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/3d049fe9a06c85e6fcd2af90a7561f0cde2fe6c9

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Citations in the corpus

Inflation Dynamics and the Great Recession (2011, background): “Rudd and Whelan (2005, 2007) and Mazumder (2010) criticize Gali and Gertler’s work.”
Understanding the flattening Phillips curve (2010, unknown): “15 The importance of the data vintage has also been noted by Rudd and Whelan (2005) and”
Weak Instrument Robust Tests in GMM and the New Keynesian Phillips Curve (2009, background): “Some argue that the standard hybrid NKPC is misspecified due to omitted dynamics (e.g., Rudd and Whelan 2007) while others allow for autocorrelated structural shocks (e.g., Smets and Wouters 2007).”
Predicting inflation dynamics with singular spectrum analysis (2013, methodology): “We refer interested readers to Rudd and Whelan (2007) for excellent discussions of the development of the Phillips curve analysis, and to Fair (2008) on empirical estimations of alternative Phillips curve-based models.”
Instability and Nonlinearity in the Euro-Area Phillips Curve (2012, unknown): “Third, recent studies, in particular by Rudd and Whelan (2007), cast doubt on the ability of the NKPC (including its hybrid form, that is, with added lags of inflation) to provide a useful empirical characterisation of the inflation process and present evidence in support of the traditional…”
Empirical Evidence on Inflation Expectations in the New Keynesian Phillips Curve (2014, methodology): “This can be thought of as a variant of the first approach.”