TY  - JOUR
AU  - Gertler,Mark
AU  - Leahy,John
TI  - A Phillips Curve with an Ss Foundation
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 11971
PY  - 2006
Y2  - January 2006
UR  - http://www.nber.org/papers/w11971
L1  - http://www.nber.org/papers/w11971.pdf
N1  - Author contact info:
Mark Gertler
Department of Economics
New York University
269 Mercer Street, 7th Floor
New York, NY 10003
Tel: 212/998-8931
Fax: 212/995-4186
E-Mail: mark.gertler@nyu.edu

John V. Leahy
Department of Economics
New York University
19 W. 4th Street, 6th Floor
New York, NY  10012
Tel: 212/992-9770
E-Mail: john.leahy@nyu.edu
AB  - We develop an analytically tractable Phillips curve based on state-dependent pricing.  We differ from the existing literature by considering a local approximation around a zero inflation steady state and introducing idiosyncratic shocks.  The resulting Phillips curve is a simple variation of the conventional time-dependent Calvo formulation, but with some important differences.  First, the model is able to match the micro evidence on both the magnitude and timing of price adjustments.  Second, holding constant the frequency of price adjustment, our state-dependent model exhibits greater flexibility in the aggregate price level than does the time-dependent model.  On the other hand, with real rigidities present, our state-dependent pricing framework can exhibit considerable nominal stickiness, of the same order by a conventional time-dependent model.
ER  -