Reconsidering the natural rate hypothesis in a New Keynesian framework

Levin, Andrew T.; Yun, Tack

doi:10.1016/j.jmoneco.2007.06.006

Cited by 61 publications

(58 citation statements)

References 42 publications

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“…4 4 The graph on the right magnifies the version on the left to emphasize the behavior at very low rates of inflation. A similar figure appears in Yun (2005), Levin and Yun (2007), and Ascari and Merkl (2009).…”

Section: The Zero Inflation Steady-state Approximationsupporting

confidence: 70%

“…Hence, they may not adjust their prices in response to a shock, which leads to a greater impact of monetary shocks on output. Levin and Yun (2007) analyze the steady-state properties of a model in which firms are subject to a cost of price adjustment but are allowed to choose the frequency of price changes once and for all, given a constant average steady-state inflation. The equilibrium average frequency of price adjustment is then endogenous and increases with steady-state inflation.…”

Section: Endogenous Frequency Of Price Adjustmentmentioning

confidence: 99%

“…The equilibrium average frequency of price adjustment is then endogenous and increases with steady-state inflation. The solid line in Figure 15a shows the steady-state relationship, given our benchmark calibration, between trend inflation and the probability of price adjustment, θ, implied by the Levin and Yun (2007) model. In this model, the steadystate relationship between output and inflation is different from that shown in Figure 9.…”

Section: Endogenous Frequency Of Price Adjustmentmentioning

confidence: 99%

“…Since, under endogenous price stickiness, the long-run Phillips curve is different, it follows that the term ∂Ŷ ∂π LR will be different, and this may change some of the results surveyed above. Kurozumi (2013) follows this intuition and employs the steady-state relationship defined in Levin and Yun (2007) to study how much endogenous price stickiness affects the results in Ropele (2007, 2009). For our standard calibration, Figure 15b shows that with high trend inflation (the cases of π = 4, 6, and 8 percent are shown in the figure), the determinacy region increases, contrary to what we showed in Figure 11.…”

Section: Endogenous Frequency Of Price Adjustmentmentioning

confidence: 99%

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The Macroeconomics of Trend Inflation

2013

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Most macroeconomic models for monetary policy analysis are approximated around a zero inflation steady state, but most central banks target an inflation rate of about 2 percent. Many economists have recently proposed even higher inflation targets to reduce the incidence of the zero lower bound constraint on monetary policy. In this survey, we show that the conduct of monetary policy should be analyzed by appropriately accounting for the positive trend inflation targeted by policymakers. We first review empirical research on the evolution and dynamics of U.S. trend inflation and some proposed new measures to assess the volatility and persistence of trend-based inflation gaps. We then construct a Generalized New Keynesian model that accounts for a positive trend inflation. In this model an increase in trend inflation is associated with a more volatile and unstable economy and tends to destabilize inflation expectations. This analysis offers a note of caution regarding recent proposals to address the existing zero lower bound problem by raising the long-run inflation target.

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Section: The Zero Inflation Steady-state Approximationsupporting

confidence: 70%

Section: Endogenous Frequency Of Price Adjustmentmentioning

confidence: 99%

Section: Endogenous Frequency Of Price Adjustmentmentioning

confidence: 99%

Section: Endogenous Frequency Of Price Adjustmentmentioning

confidence: 99%

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The Macroeconomics of Trend Inflation

2013

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“…Levin and Yun (2007) follow the approach pursued here, allowing firms to change contract duration in a Calvo pricing framework. Following the analysis of Romer (1999) and Devereux and Yetman (2002), they describe a Nash equilibrium in which each firm within an industry chooses its contract duration given the parameter chosen by all other firms, and in equilibrium all firms choose the same duration.…”

Section: Solving the Model When κ Is Endogenousmentioning

confidence: 99%

Price adjustment and exchange rate pass-through

Devereux

Yetman

2010

Journal of International Money and Finance

116

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This paper develops a simple theoretical model that can be used to account for the determinants of exchange rate pass-through to consumer prices. While recent evidence has found low estimates of pass-through in many countries, there is little consensus on an explanation for this. Our paper argues that sticky prices represent a key determinant of exchange rate pass-through. We make this argument in two stages. First, holding the frequency of price change constant, we show that our model calibrated to data from low inflation countries can reproduce the estimates of very low pass-through for these countries. The principal determinant of low pass-through in this case is the slow adjustment of prices. We then extend the model to allow the frequency of price change to be endogenous. Calibrating to a wider set of countries, including both low-inflation and high-inflation countries, we show that our model implies that exchange rate passthrough is increasing in average inflation, but at a declining rate.

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Posterior‐predictive Evidence on Us Inflation Using Extended New Keynesian Phillips Curve Models With Non‐filtered Data

Baştürk

Çakmaklı

Ceyhan

et al. 2014

J of Applied Econometrics

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SUMMARYChanging time series properties of US inflation and economic activity, measured as marginal costs, are modeled within a set of extended New Keynesian Phillips curve (NKPC) models. It is shown that mechanical removal or modeling of simple low‐frequency movements in the data may yield poor predictive results which depend on the model specification used. Basic NKPC models are extended to include structural time series models that describe typical time‐varying patterns in levels and volatilities. Forward‐ and backward‐looking expectation components for inflation are incorporated and their relative importance is evaluated. Survey data on expected inflation are introduced to strengthen the information in the likelihood. Use is made of simulation‐based Bayesian techniques for the empirical analysis. No credible evidence is found on endogeneity and long‐run stability between inflation and marginal costs. Backward‐looking inflation appears stronger than forward‐looking inflation. Levels and volatilities of inflation are estimated more precisely using rich NKPC models. The extended NKPC structures compare favorably with existing basic Bayesian vector autoregressive and stochastic volatility models in terms of fit and prediction. Tails of the complete predictive distributions indicate an increase in the probability of deflation in recent years. Copyright © 2014 John Wiley & Sons, Ltd.

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Reconsidering the natural rate hypothesis in a New Keynesian framework

Cited by 61 publications

References 42 publications

The Macroeconomics of Trend Inflation

The Macroeconomics of Trend Inflation

Price adjustment and exchange rate pass-through

Posterior‐predictive Evidence on Us Inflation Using Extended New Keynesian Phillips Curve Models With Non‐filtered Data

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