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The reset inflation puzzle and the heterogeneity in price stickiness

Kara, Engin ORCID: 2015. The reset inflation puzzle and the heterogeneity in price stickiness. Journal of Monetary Economics 76 , pp. 29-37. 10.1016/j.jmoneco.2015.07.002

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New Keynesian models have been criticised on the grounds that they require implausibly large price shocks to explain inflation. Bils et al. (2012) show that, while these shocks are needed to reduce the excessive inflation persistence generated by the models, they give rise to unrealistically volatile reset price inflation. This paper shows that introducing heterogeneity in price stickiness in the models overcomes these criticisms directed at them. The incorporation of heterogeneity in price stickiness reduces the need for large price shocks. With smaller price shocks, the new model comes close to matching the data on reset inflation.

Item Type: Article
Date Type: Publication
Status: Published
Schools: Business (Including Economics)
Publisher: Elsevier
ISSN: 0304-3932
Date of Acceptance: 29 July 2015
Last Modified: 24 Oct 2022 07:36

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