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Phillips Correlation and Trend Inflation under the Kinked Demand Curve

Author

Listed:
  • Toyoichiro Shirota

    (Bank of Japan)

Abstract

This paper explains the weak 'Phillips correlation' under low trend inflation.This correlation is confirmed empirically but the standard sticky price models fail to account for it. This paper extends the standard sticky price model to the case of the "smoothed off kinked" demand curve, which is typically regarded as a source of the strategic complementarity. Our results suggest that the kinked demand curve can offer an appropriate explanation to fill this gap between the theoretical implication and the empirical facts.

Suggested Citation

  • Toyoichiro Shirota, 2007. "Phillips Correlation and Trend Inflation under the Kinked Demand Curve," Bank of Japan Working Paper Series 07-E-5, Bank of Japan.
    • Handle: RePEc:boj:bojwps:07-e-5
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    File URL: http://www.boj.or.jp/en/research/wps_rev/wps_2007/data/wp07e05.pdf
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    Citations

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    Cited by:

    1. Marianna Riggi & Sergio Santoro, 2015. "On the Slope and the Persistence of the Italian Phillips Curve," International Journal of Central Banking, International Journal of Central Banking, vol. 11(2), pages 157-197, March.
    2. Takushi Kurozumi & Willem Van Zandweghe, 2016. "Kinked Demand Curves, the Natural Rate Hypothesis, and Macroeconomic Stability," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 20, pages 240-257, April.
    3. Diego Moccero & Shingo Watanabe & Boris Cournède, 2011. "What Drives Inflation in the Major OECD Economies?," OECD Economics Department Working Papers 854, OECD Publishing.

    More about this item

    Keywords

    sticky prices; trend inflation; kinked demand curve;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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