Phillips Correlation and Trend Inflation under the Kinked Demand Curve

No 07-E-5, Bank of Japan Working Paper Series from Bank of Japan

Abstract: This paper explains the weak 'Phillips correlation' under low trend inflation.This correlation is confirmed empirically but the standard sticky price models fail to account for it. This paper extends the standard sticky price model to the case of the "smoothed off kinked" demand curve, which is typically regarded as a source of the strategic complementarity. Our results suggest that the kinked demand curve can offer an appropriate explanation to fill this gap between the theoretical implication and the empirical facts.

Keywords: sticky prices; trend inflation; kinked demand curve (search for similar items in EconPapers)
JEL-codes: E31 E32 (search for similar items in EconPapers)
Date: 2007-02
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Citations: View citations in EconPapers (4)

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