This chapter examines the concept of inflation persistence in macroeconomic theory. It begins with a definition of persistence, emphasizing the difference between reduced-form and structural persistence. It then examines a number of empirical measures of reduced-form persistence, considering the possibility that persistence has changed over time. The chapter then examines the theoretical sources of persistence, distinguishing “intrinsic ” from “inherited” persistence, and deriving a number of analytical results on persistence. It summarizes the implications for persistence from the literatures on “stickyinformation” models, learning and so-called trend inflation models, providing some new results throughout.

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We examine optimal and other monetary policies in a linear-quadratic setup with a relatively general form of model uncertainty, so-called Markov jump-linear-quadratic systems extended to include forward-looking variables and unobservable “modes. ” The form of model uncertainty our framework encompasses includes: simple i.i.d. model deviations; serially correlated model deviations; estimable regime-switching models; more complex structural uncertainty about very different models, for instance, backward- and forward-looking models; time-varying centralbank judgment about the state of model uncertainty; and so forth. We provide an algorithm for finding the optimal policy as well as solutions for arbitrary policy functions. This allows us to compute and plot consistent distribution forecasts—fan charts—of target variables and instruments. Our methods hence extend certainty equivalence and “mean forecast targeting ” to more general certainty non-equivalence and “distribution forecast targeting.” JEL Classification: E42, E52, E58

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This paper reviews Bayesian methods that have been developed in recent years to estimate and evaluate dynamic stochastic general equilibrium (DSGE) models. We consider the estimation of linearized DSGE models, the evaluation of models based on Bayesian model checking, posterior odds comparisons, and comparisons to vector autoregressions, as well as the nonlinear estimation based on a second-order accurate model solution. These methods are applied to data generated from correctly specified and misspecified linearized DSGE models, and a DSGE model that was solved with a second-order perturbation method. (JEL C11, C32, C51, C52)

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What is the optimal monetary policy, and how can the central bank implement it? Both questions have been extensively studied, but always in the context of simple theoretical structures, which by design are limited in their ability to account for actual observed business cycle fluctuations. This article seeks to characterize optimal monetary policy and its implementation using a medium-scale, empirically plausible model of the U.S. business cycle. The model we consider is the one developed in Altig and others (2005). This model has been estimated econometrically and shown to account fairly well for business cycle fluctuations in the postwar United States. The theoretical framework emphasizes the importance of combining nominal as well as real rigidities in explaining the propagation of macroeconomic shocks. Specifically, the model features four nominal frictions (sticky prices, sticky wages, a transactional demand for money by households, and a cash-in-advance constraint on the wage bill of firms) and four sources of real rigidities (investment adjustment costs, variable capacity utilization, habit formation, and imperfect competition in product and factor markets). Aggregate

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This paper documents nominal wage stickiness using an original quarterly firm-level dataset. We use the ACEMO survey, which reports the base wage for up to 12 employee categories in French firms over the period 1998 to 2005, and obtain the following main results. First, the quarterly frequency of wage change is around 35 percent. Second, there is some downward rigidity in the base wage. Third, wage changes are mainly synchronized within firms but to a large extent staggered across firms. Fourth, standard Calvo or Taylor schemes fail to match micro wage adjustment patterns, but fixed duration ’Taylor-like’wage contracts are observed for a minority of …rms. Based on a two-thresholds sample selection model, we perform an econometric analysis of wage changes. Our results suggest that the timing of wage adjustments is not state-dependent, and are consistent with existence of predetermined of wage changes. They also suggest that both backward- and forward-looking behavior is relevant in wage setting.

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