Introducing price-setting behaviour in the Phillips Curve: the role of nonlinearities

Sophie Saglio and Antonia López-Villavicencio
Authors registered in the RePEc Author Service: Antonia López Villavicencio

MPRA Paper from University Library of Munich, Germany

Abstract: Based on the theoretical literature on price setting behavior, we model three distinct forms of nonlinearity that can describe the reduced-form Phillips curve: reaction asymmetry, state dependence and a mix of both. Employing these models to the G5 for the 1985-2011 period, we find that: (i) the Phillips curve is unstable and nonlinear and (ii) there exist threshold levels of inflation and capacity utilization that erode price rigidity. Our results reinforce the existence of downward price rigidity in Japan, helping to explain the puzzle of gradual deflation. In opposition, downward price flexibility is verified for U.S.

Keywords: Phillips Curve; deflation; rigidity; capacity constraint; non-linearity (search for similar items in EconPapers)
JEL-codes: C32 C51 E31 (search for similar items in EconPapers)
Date: 2012-12-11
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://mpra.ub.uni-muenchen.de/46646/1/MPRA_paper_46646.pdf original version (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:46646

Access Statistics for this paper

More papers in MPRA Paper from University Library of Munich, Germany Ludwigstraße 33, D-80539 Munich, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Joachim Winter ().