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Inflation Dynamics and Inflation Regimes

Author

Listed:
  • David Demery
  • Nigel Duck

Abstract

In this paper we develop and estimate a new-Keynesian model of inflation and use it to investigate the hypothesis that prices in the UK are re-set more frequently during periods of high inflation. In the model, firms are assumed to condition their expectations on an optimally-selected but incomplete information set and we further assume that the probability that they will reset their price in any quarter depends upon the prevailing inflationary regime. The model implies more complex inflation dynamics than conventional new-Keynesian models predict. We find that we cannot reject the formal restrictions implied by the model (using UK quarterly data) and we estimate that the mean time before prices were reset was around eight months during the 'high' inflationary regime and approximately two years when mean inflation was 'low'.

Suggested Citation

  • David Demery & Nigel Duck, 2003. "Inflation Dynamics and Inflation Regimes," Bristol Economics Discussion Papers 03/549, School of Economics, University of Bristol, UK.
    • Handle: RePEc:bri:uobdis:03/549
    as

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    References listed on IDEAS

    as
    1. David Demery & Nigel Duck, 2002. "Optimally Rational Expectations and Macroeconomics," Bristol Economics Discussion Papers 02/533, School of Economics, University of Bristol, UK.
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    More about this item

    Keywords

    Rational expectations; incomplete information; macroeconomic dynamics; regime switching;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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