Inflation Dynamics and Inflation Regimes

David Demery and Nigel Duck ()

Bristol Economics Discussion Papers from School of Economics, University of Bristol, UK

Abstract: In this paper we develop and estimate a new-Keynesian model of inflation and use it to investigate the hypothesis that prices in the UK are re-set more frequently during periods of high inflation. In the model, firms are assumed to condition their expectations on an optimally-selected but incomplete information set and we further assume that the probability that they will reset their price in any quarter depends upon the prevailing inflationary regime. The model implies more complex inflation dynamics than conventional new-Keynesian models predict. We find that we cannot reject the formal restrictions implied by the model (using UK quarterly data) and we estimate that the mean time before prices were reset was around eight months during the 'high' inflationary regime and approximately two years when mean inflation was 'low'.

Keywords: Rational expectations; incomplete information; macroeconomic dynamics; regime switching (search for similar items in EconPapers)
JEL-codes: E21 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2003-02
New Economics Papers: this item is included in nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:bri:uobdis:03/549

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