Inflation persistence, Working paper (Federal Reserve
- University, New York. Fuhrer, Jeff, George Moore
This paper is an important contribution to the literature on the microeconomic foundations of macroeconomics. Caballero and Engel take as given some of the ‘facts’ of the behavior of the aggregate price level in particular the high degree of persistence. They then endeavor to explain these facts using a simple model of microeconomic price adjustment. Their explicit examination of how their model fits the data using standard goodness-of-tit criteria, and their focus on explaining dynamic auto-correlations rather than simple contemporaneous correlations is particularly welcome.