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American Economic Review: Vol. 98 No. 5 (December 2008)

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

Article Citation

Cogley, Timothy, and Argia M. Sbordone. 2008. "Trend Inflation, Indexation, and Inflation Persistence in the New Keynesian Phillips Curve." American Economic Review, 98(5): 2101-26.

DOI: 10.1257/aer.98.5.2101

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)

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Authors

Cogley, Timothy (U CA, Davis)
Sbordone, Argia M. (Federal Reserve Bank of New York)

JEL Classifications

E12: General Aggregative Models: Keynes; Keynesian; Post-Keynesian
E31: Price Level; Inflation; Deflation
E52: Monetary Policy


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