Type

Report

Authors

Karl Whelan
Jeremy Rudd

Subjects

Economics

Topics
phillips curve inflation finance mathematical models business cycles hybrid model output gap pricing united states inflation expectations rational expectations economic theory united states

Can rational expectations sticky-price models explain inflation dynamics (2003)

Abstract Recent years have seen an important trend in macroeconomic research towards analysing business cycles and stabilization policy in the context of models that incorporate both nominal rigidities and optimising agents with rational expectations. The canonical specification for the behaviour of inflation in these sticky-price rational expectations models (which is known as the new-Keynesian Phillips curve) is often criticized on the grounds that it fails to account for the dependence of inflation on its own lags. In response, many recent studies have employed a “hybrid” sticky-price specification in which inflation depends on a weighted average of lagged and expected future values of itself, in addition to a driving variable such as the output gap. In this paper, we consider some simple tests of the hybrid model that are derived from the model's closed-form solution. Our results suggest that the hybrid model provides a poor description of empirical inflation dynamics, and that there is little evidence of the type of rational forward-looking behavior implied by the model.
Collections Ireland -> University College Dublin -> School of Economics
Ireland -> University College Dublin -> College of Social Sciences and Law
Ireland -> University College Dublin -> Economics Research Collection

Full list of authors on original publication

Karl Whelan, Jeremy Rudd

Experts in our system

1
Karl Whelan
University College Dublin
Total Publications: 70