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The Phillips Curve and a Micro-foundation of Trend Inflation

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  • Harashima, Taiji

Abstract

The hybrid New Keynesian Phillips curve has been criticized for lacking a micro-foundation. In this paper, an alternative purely forward-looking model of the Phillips curve is constructed on the basis of a micro-foundation of trend inflation. In addition, another source of output gaps other than frictions―a Nash equilibrium of a Pareto inefficient path―is considered. The model indicates that the role of frictions has been overestimated and that frictions are less important than previously have been thought. The conventional monetary policy of utilizing frictions cannot necessarily stabilize inflation. In contrast, the monetary policy of controlling the government’s preference is very effective. A problem is that the effects of both types of monetary policy are not distinguishable.

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  • Harashima, Taiji, 2013. "The Phillips Curve and a Micro-foundation of Trend Inflation," MPRA Paper 51305, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:51305
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    1. Harashima, Taiji, 2020. "A Theory of the Credit-to-GDP Gap: Using Credit Gaps to Predict Financial Crises," MPRA Paper 111732, University Library of Munich, Germany.

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    More about this item

    Keywords

    Trend inflation; inflation persistence; central bank independence; The New Keynesian Phillips curve; the fiscal theory of the price level;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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