TITLE

New Keynesian Explanations of Cyclical Movements in Aggregate Inflation and Regional Inflation Differentials

AUTHOR(S)
Canzoneri, Matthew; Cumby, Robert; Diba, Behzad; Mykhaylova, Olena
PUB. DATE
January 2006
SOURCE
Open Economies Review;Jan2006, Vol. 17 Issue 1, p27
SOURCE TYPE
Academic Journal
DOC. TYPE
Article
ABSTRACT
What determines the cyclical behavior of aggregate inflation and regional inflation differentials? The answer has strong implications for monetary policy and in Europe for the Stability and Growth Pact. In the United States, inflation rates move pro-cyclically, and across the Euro Area, inflation differentials are positively correlated with growth differentials. This suggests that demand shocks are the primary determinants of the cyclical behavior of aggregate inflation and regional inflation differentials. In this paper, we discuss New Keynesian explanations of these correlations, and we argue that demand shocks are either missing or inadequately modeled in the in typical New Keynesian model.
ACCESSION #
19551424

 

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