Flattening of the Phillips curve under low trend inflation

Shirota, Toyoichiro

doi:10.1016/j.econlet.2015.04.027

Cited by 12 publications

(9 citation statements)

References 16 publications

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“…The common observation in Section 5.1 is that MI could weaken the response of the inflation rate, implying that MI could flatten the slope of the output-inflation relationship. To confirm this flattening effect of MI, as in Shirota (2015), we simulate the model by generating a series of random numbers as monetary policy shocks from a normal distribution with a mean of zero and the standard deviation of 0.1. Figure 3 shows a scatter plot of the responses of output and inflation rates.…”

Section: Simulated Relationship Between Output and Inflation Ratementioning

confidence: 99%

“…To confirm this flattening effect of MI, as in Shirota (2015), we simulate the model by generating a series of random numbers as monetary policy shocks from a normal distribution with a mean of zero and the standard deviation of 0.1. Figure 3 shows a scatter plot of the responses of output and inflation rates.…”

Section: Numerical Simulationmentioning

confidence: 99%

“…For the recent issue of the flattened Phillips curve, see, for example, IMF (2013),Coibion and Gorodnichenko (2015), andShirota (2015).4 Under our assumption, 𝜉 can be interpreted as being endogenous in our model in the following sense:𝜉 = 𝐼𝑛𝑋 𝑛 ∕𝐼𝑛(𝑋 𝑛 ∕𝑃)where 𝜉 is obtained by solving the equation (𝑋 𝑛 ∕𝑃) 𝜉 = 𝑋 𝑛 for 𝜉. We can observe that the greater the difference between nominal and real variable is, the stronger the degree of MI 𝜉 is.…”

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confidence: 99%

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Inflation response in a New Keynesian model with money illusion

Tamegawa

2024

Bulletin of Econ Res

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This study investigates the role of money illusion (MI) in a dynamic stochastic general equilibrium model. We introduce MI such that households, in their intertemporal optimization, erroneously recognize nominal variables as real ones. We find that first, our model could exhibit money nonneutrality in the long run; second, the Taylor principle is a sufficient condition for determinacy but not a necessary condition; third, the response to output in monetary policy rule matters for the model not to exhibit money nonneutrality in the long run; and finally, MI could flatten the slope that represents the output‐inflation trade‐off.

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Section: Simulated Relationship Between Output and Inflation Ratementioning

confidence: 99%

Section: Numerical Simulationmentioning

confidence: 99%

mentioning

confidence: 99%

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Inflation response in a New Keynesian model with money illusion

Tamegawa

2024

Bulletin of Econ Res

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“…Ropele (2009) andCoibion and Gorodnichenko (2011). Once the variable elasticity demand curves are incorporated, the violation of the natural rate hypothesis becomes minor and the indeterminacy is largely prevented, as shown by Kurozumi and Van Zandweghe (2016), while lower trend in ‡ation weakens the relationship between output and in ‡ation, as demonstrated byShirota (2015).The remainder of the paper proceeds as follows. Section 2 presents a Calvo staggered price model with constant trend in ‡ation, variable elasticity demand curves for goods, and a …xed cost of production.…”

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confidence: 94%

Variable Elasticity Demand and Inflation Persistence

Kurozumi¹,

Zandweghe²

2018

RWP

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We propose a novel explanation for the well-known persistent in ‡ation response to monetary policy shocks by introducing variable elasticity demand curves in a staggered price model with trend in ‡ation. The demand curves induce strategic complementarity in price setting and thus generate in ‡ation persistence under positive trend in ‡ation through the e¤ect on in ‡ation dynamics of a measure of price dispersion, which di¤ers from relative price distortion. We also show that credible disin ‡ation leads to a gradual decline in in ‡ation and a fall in output and that lower trend in ‡ation reduces in ‡ation persistence, as observed around the time of the Volcker disin ‡ation.JEL Classi…cation: E31, E52

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“…Dotsey and King (2005) employ a state-dependent pricing model to show that the persistence of output and inflation increases in the presence of variable elasticity of demand. Shirota (2015) and Kurozumi and Van Zandweghe (2016) incorporate not only variable elasticity but also trend inflation in staggered price-setting models to analyze their implications for the relationship between output and inflation and for determinacy of equilibrium (but not for inflation persistence). 6 The relevant measure of price dispersion differs from the relative price distortion, which captures the loss in aggregate output due to demand dispersion.…”

Section: Introductionmentioning

confidence: 99%

A Theory of Intrinsic Inflation Persistence

Kurozumi

Zandweghe

2019

Working Paper (Federal Reserve Bank of Cleveland)

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We propose a novel theory of intrinsic inflation persistence by introducing trend inflation and variable elasticity of demand in a model with staggered price and wage setting. Under nonzero trend inflation, the variable elasticity generates intrinsic persistence in inflation through a measure of price dispersion stemming from staggered price setting. It also introduces intrinsic persistence in wage inflation under staggered wage setting, which affects price inflation. With the theory we show that inflation exhibits a persistent, hump-shaped response to a monetary policy shock. We also show that a credible disinflation leads to a gradual decline in inflation and a fall in output, and lower trend inflation reduces inflation persistence, as observed around the time of the Volcker disinflation.

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Flattening of the Phillips curve under low trend inflation

Cited by 12 publications

References 16 publications

Inflation response in a New Keynesian model with money illusion

Inflation response in a New Keynesian model with money illusion

Variable Elasticity Demand and Inflation Persistence

A Theory of Intrinsic Inflation Persistence

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