Modeling Inflation Dynamics: A Critical Review of Recent Research

In recent years, a broad academic consensus has arisen that favors using rational expectations sticky-price models to capture inflation dynamics. We review the principal conclusions of this literature concerning: (1) the ability of these models to fit the data; (2) the importance of rational forward...

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Bibliographic Details
Published in:	Journal of money, credit and banking Vol. 39; no. s1; pp. 155 - 170
Main Authors:	RUDD, JEREMY, WHELAN, KARL
Format:	Journal Article
Language:	English
Published:	Malden, USA Blackwell Publishing Inc 01-02-2007 Blackwell Publishing John Wiley & Sons, Inc Ohio State University Press
Subjects:	Analysis Bank credit E31 Econometric models Economic dynamics Economic models Empirical evidence Forecasts and trends Income shares Inflation Inflation (Economics) Inflation (Finance) Inflation expectations Inflation rate Inflation rates Macroeconomics Marginal costs Market trend/market analysis Model testing Modeling Modelling Monetary economics Output gaps Phillips curve Prices Proxy reporting Proxy statements Rational expectations Sticky prices Studies United States United States
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Summary:	In recent years, a broad academic consensus has arisen that favors using rational expectations sticky-price models to capture inflation dynamics. We review the principal conclusions of this literature concerning: (1) the ability of these models to fit the data; (2) the importance of rational forward-looking expectations in price setting; and (3) the appropriate measure of inflationary pressures. We argue that existing models fail to provide a useful empirical description of the inflation process.
Bibliography:	istex:18526517F025CA93A1A0796A16897D1C428641BD ark:/67375/WNG-FFLFZ0W6-T ArticleID:JMCB019 A more complete version of this paper was presented at the FRB/JMCB conference “Quantitative Evidence on Price Determination.” We are grateful to our conference discussants, Laurence Ball and Bennett McCallum, and to two anonymous referees for a number of helpful comments. The views expressed are our own and do not necessarily reflect the views of the Board of Governors, the staff of the Federal Reserve System, or the Central Bank of Ireland. Rudd and Whelan 2005c ObjectType-Article-2 SourceType-Scholarly Journals-1 ObjectType-Feature-1 content type line 23
ISSN:	0022-2879 1538-4616
DOI:	10.1111/j.1538-4616.2007.00019.x