Pricing Policies and Inflation Inertia

By Michael Kumhof, Luis Felipe Céspedes, Eric Parrado

April 1, 2003

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Michael Kumhof, Luis Felipe Céspedes, and Eric Parrado. Pricing Policies and Inflation Inertia, (USA: International Monetary Fund, 2003) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper provides a monetary model with nominal rigidities that differs from the conventional New Keynesian model with firms setting pricing policies instead of price levels. In response to permanent or highly persistent monetary policy shocks this model generates the empirically observed slow (inertial) and prolonged (persistent) reaction of the inflation rate, and also the recession that typically accompanies moderate disinflations. The reason is that firms respond to such shocks mostly through a change in the long-run or inflation updating component of their pricing policies. With staggered pricing policies there is a time lag before this is reflected in aggregate inflation.

Subject: Disinflation, Inflation, Inflation persistence, Real interest rates, Sticky prices

Keywords: Monetary policy, WP

Publication Details

Pages:

27
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2003/087
Stock No:

WPIEA0872003
ISBN:

9781451851045
ISSN:

1018-5941

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