Monetary Dynamic Stochastic General Equilibrium Models and Inflation Persistence

Abstract

The paper investigates the capacity of New Keynesian (NK) models to explain inflation persistence without relying on ad hoc backwards-looking mechanisms or external source of inertia. It explores various features of NK models- such as sticky wages, roundabout production structure, positive trend inflation, and monetary policy inertia- that could generate persistent inflation. The paper's main finding is that the interaction between sticky prices, sticky wages, intermediate input, real frictions and the Taylor rule, especially the inertial component of the rule, is particularly effective in generating highly serially correlated movements in inflation as observed in data.