ABSTRACT

Can Rational Expectations Sticky-Price Models Explain Inflation Dynamics? (American Economic Review, March 2006, with Jeremy Rudd).

The canonical inflation specification in sticky-price rational expectations models (the new-Keynesian Phillips curve) is often criticized for failing to account for the dependence of inflation on its own lags. In response, many recent studies have employed a "hybrid" sticky-price specification in which inflation depends on a weighted average of lagged and expected future values of itself, in addition to a driving variable such as the output gap. We consider some simple tests of the hybrid model that are derived from the model's closed-form solution. Our results suggest that the hybrid model describes empirical inflation dynamics poorly, and that there is little evidence of the type of rational forward-looking behavior implied by the model.