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Phillips Correlation and Trend Inflation under the Kinked Demand Curve

February 2007
Toyoichiro Shirota*1

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This paper explains the weak 'Phillips correlation' under low trend inflation. This correlation is confirmed empirically but the standard sticky price models fail to account for it. This paper extends the standard sticky price model to the case of the "smoothed off kinked" demand curve, which is typically regarded as a source of the strategic complementarity. Our results suggest that the kinked demand curve can offer an appropriate explanation to fill this gap between the theoretical implication and the empirical facts.

JEL classification: E31, E32

sticky prices; trend inflation; kinked demand curve

I thank seminar participants at the Bank of Japan and other members of research staff for comments. The analysis and conclusions set forth are those of the author and do not indicate concurrence by other members of the research staff or the Bank of Japan.

  • *1 Economic Analysis, Research and Statistics Dept., Bank of Japan;


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