Antonia López-Villavicencio & Valérie Mignon , 2013.
"Nonlinearity of the inflation-output trade-off and time-varying price rigidity,"
CEPII Working Paper 2013- 02 , January 2013 , CEPII.
Relying on the backward-looking Phillips curve; we estimate the level of inflation that erodes price rigidity and investigate its time constancy. To this end; we employ smooth transition regression models with rolling regressions to account for varying threshold inflation levels. Studying six advanced countries over the 1970-2012 period; our results show that both the slope of the Phillips curve and the threshold; trend inflation that erodes price rigidity are time varying. These characteristics could not be captured by a static linear or nonlinear model; illustrating the rich flexibility embedded in our proposed model.
Phillips curve ; inflation ; price rigidity ; nonlinearity ; menu costs