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Pricing Policies and Inflation Inertia
Author:
Mr. Michael Kumhof
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Mr. Luis Felipe Céspedes null

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Mr. Eric Parrado null

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Series:
IMF Working Papers
Volume/Issue:
Volume 2003: Issue 087
Language:
English
Publication Date:
01 Apr 2003
DOI:
https://doi.org/10.5089/9781451851045.001
ISBN:
9781451851045
ISSN:
1018-5941
Pages:
27
Keywords:
WP; monetary policy
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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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.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund