Abstract

Abstract: In this paper, we formulate a dynamic general equilibrium model with staggered nominal contracts, in which households and Þrms use optimal Þltering to disentangle persistent and transitory shifts in the monetary policy rule. The calibrated model accounts quite well for the dynamics of output and inßation during the Volcker disinßation, and implies a sacriÞce ratio very close to the estimated value. Our approach indicates that inßation persistence and substantial costs of disinßation can be generated in an optimizing-agent framework, without relaxing the assumption of rational expectations or relying on arbitrary modiÞcations to the aggregate supply relation. JEL classiÞcation: E31; E32; E52.

Citations