Book Description

This dissertation proposes a new Phillips curve that is able to endogenously generate inflation persistence in a profit-maximizing framework featuring sticky prices, in response to the critique to ad-hoc approaches directly incorporating a lagged inflation term into the Phillips curve by assuming that a fraction of firms reset their prices by automatic indexation to past period's inflation rate. In order to generate a lagged inflation term as a source of inflation persistence, I assume that although firms change their prices at discrete time intervals, they can not completely adjust prices due convex costs of changing prices. Hence, this dissertation introduces dual price stickiness with respect to the frequency and size of price adjustment. In addition to the dual price stickiness, this dissertation investigates the potential presence of dual wage stickiness: with respect to both the frequency as well as the size of wage adjustments. In particular, I derive a model of wage inflation dynamics assuming that although workers adjust wage contracts at discrete time intervals, they are limited in their abilities to adjust wages as much as they might desire.