Imperfect Credibility and Inflation Persistence

By Andrew T. Levin, C. Erceg. 2001

562 citations recorded by the source corpus.

In this paper, we formulate a dynamic general equilibrium model with staggered nominal contracts, in which households and firms use optimal filtering to disentangle persistent and transitory shifts in the monetary policy rule. The calibrated model accounts quite well for the dynamics of output and inflation during the Volcker disinflation, and implies a sacrifice ratio very close to the estimated value. Our approach indicates that inflation persistence and substantial costs of disinflation can be generated in an optimizing-agent framework, without relaxing the assumption of rational expectations or relying on arbitrary modifications to the aggregate supply relation.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/9d2da3cf0e79d20a8aa756d0a8d42151d9717693

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In Economics and Econometrics

Citations in the corpus

The Slope of the Phillips Curve: Evidence from U.S. States (2020, background): “Volcker’s monetary policy constituted a sharp regime shift that was imperfectly credible at the outset but became gradually more credible as time passed (Erceg and Levin 2003; Goodfriend and King 2005; Bianchi and Ilut 2017).”
Technology Shocks and Aggregate Fluctuations: How Well Does the Real Business Cycle Model Fit Postwar U.S. Data? (2004, unknown): “The work of Basu, Fernald, and Kimball (1999; henceforth, BFK) deserves special attention here, given its focus and the similarity of its findings to those in Galí (1999) despite the use of an unrelated methodology. BFK use a sophisticated growth accounting methodology allowing for increasing return”
Investigating inflation persistence across monetary regimes (2008, background): “5See Erceg and Levin (2003), Levin and Piger (2003) and Coenen, Levin, and Christo el (2007).”
Has the Inflation Process Changed (2006, background): “6/6 Erceg and Levin (2003) and Orphanides and Williams (2003) develop models of this sort.”
Identifying the Influences of Nominal and Real Rigidities in Aggregate Price-Setting Behavior (2007, unknown): “Inflation subsequently stabilized around the Bundesbank’s medium-term inflation objective 11As shown by Erceg and Levin (2003), even a transparent and credible disinflation causes a transitory recession in a model with four-quarter Taylor-style wage and price contracts.”
SIGMA: a new open economy model for policy analysis (2005, unknown): “One advantage of the SDGE framework is that it facilitates assessing how structural features of the economy affect its responses to findings of Fatás and Mihov (2001) and of Blanchard and Perotti (2002).”
A New Model of Inflation, Trend Inflation, and Long-Run Inflation Expectations (2015, background): “The motivation for this specification can be found in papers such as Erceg and Levin (2003), which argue that, in the absence of a credible monetary regime, long-run inflation forecasts may respond to short-run movements in inflation as well as changes in trend inflation.”
Fitting observed inflation expectations (2011, unknown): “…2003; Cogley and Sbordone, 2008; Justiniano et al., 2010), and are also popular in macro-finance (e.g., Kozicki and Tinsley, 2001; Gurkaynak et al., 2005; Rudebusch and Swanson, 2008; Dewachter, 2008). infer the time-varying target from the behavior of interest rates, as in Erceg and Levin (2003).”