Fair behavior and inflation persistence

Seidel, Gerald

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URL: http://ub-madoc.bib.uni-mannheim.de/2669
URN: urn:nbn:de:bsz:180-madoc-26698
Document Type: Working paper
Year of publication: 2005
The title of a journal, publication series: None
Publication language: English
Institution: School of Law and Economics > Sonstige - Fakultät für Rechtswissenschaft und Volkswirtschaftslehre
MADOC publication series: Sonderforschungsbereich 504 > Rationalitätskonzepte, Entscheidungsverhalten und ökonomische Modellierung (Laufzeit 1997 - 2008)
Subject: 330 Economics
Classification: JEL: Z13 E31 D63 ,
Subject headings (SWD): Inflation , Hysterese , Inflationstheorie , Preisstarrheit , Gerechtigkeit
Keywords (English): inflation inertia , fairness , staggered contracts , inflation expectations , behavioral macroeconomics
Abstract: In their seminal paper Fuhrer and Moore (1995) provide an explanation for the existence of inflation inertia. Driscoll and Holden (2003) argue that under more plausible assumptions the model of Fuhrer and Moore (1995) will coincide with the model of Taylor (1979) which can only explain sticky prices but not sticky inflation. Following the suggestions by Driscoll and Holden (2003) we extend their setting allowing for other-regarding preferences. It turns out that this new extended model is consistent with the one by Fuhrer and Moore (1995). This means that, even under the strong assumption of rational expectations, inflation is not only governed by its future expected but also by its past values. This is in line with empirical findings.
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