Habit formation is a fixture of contemporary new Keynesian models. The vast majority assume that agents form habits strictly over consumption of an aggregate good, leaving open the question of whether it might be preferable to have them form habits over differentiated products instead–an arrangement known as deep habits. I answer this question by estimating a model that nests both habit concepts as special cases. Estimates reveal that the data favor a specification in which consumption habits are stronger at the product level than at the aggregate level. A mix of significance tests and simulation results indicate that including deep habits greatly improves model fit, most notably with regard to inflation dynamics.

We investigate the importance of trend inflation and the real-activity gap in explaining inflation in G7 countries since 1960. Our analysis is based on a bivariate unobserved components model of inflation and unemployment in which inflation is decomposed into a stochastic trend and a transitory component. As in recent implementations of the New Keynesian Phillips Curve, it is the transitory component of inflation, or “inflation gap,” that is driven by the real-activity gap, which we measure as the deviation of unemployment from its natural rate. We find that both trend inflation and the inflation gap have been consistent and substantial determinants of inflation at business cycle horizons for all G7 countries since 1960. Also, the real-activity gap explains a large fraction of the variation in the inflation gap for each country. These results provide empirical support for the New Keynesian Phillips Curve augmented with trend inflation.

The paper proposes a New Keynesian monetary model where firms' pricing policies feature a forward-looking optimal choice of the rate of price growth. The model can be thought of as a reduced form model of rational inattention that has only one additional state variable relative to the Calvo model [Journal of Monetary Economics 12 (1983), 383–398]. Like the model of backward-looking automatic indexation to past aggregate inflation, it generates a gradual and persistent reaction of the inflation rate, and output losses, following highly persistent monetary shocks. But unlike that model, its price setters behave very similarly to Calvo price setters when shocks are transitory.

We generalize existing fair wage models to allow effort to vary over the business cycle. When effort is variable, wage fluctuations are partially compensated for by endogenous effort fluctuations, so that the sensitivity of marginal cost to output and employment variations is decreased. This new mechanism decreases the need for sluggishness to explain the observed high inflation persistence.

This paper considers a sticky price model with a cash-in-advance constraint where agents forecast inflation rates with the help of econometric models. Agents use least-squares learning to estimate two competing models of which one is consistent with rational expectations once learning is complete. When past performance governs the choice of forecast model, agents may prefer to use the inconsistent forecast model, which generates an equilibrium where forecasts are only constrained rational. Output and inflation then display persistence, inflation responds sluggishly to nominal disturbances, and the dynamic correlations of output and inflation match U.S. data surprisingly well. The rational expectations equilibrium instead has great difficulty in matching any of these features.

Nous dérivons les dynamiques de l'inflation issues des différentes hypothèses d'ajustement des prix rencontrées dans la littérature néo-keynésienne. Pour chaque modèle nous calculons la réponse de l'inflation et du produit suite à un choc sur le taux de croissance de la masse monétaire. Nous constatons que seules deux modélisations reproduisent correctement certains faits stylisés importants concernant l'impact de ce type de choc monétaire : la première est la spécification avec prix prédéterminés de Mankiw et Reis (2002) et la seconde celle à prix fixes de Galí et Gertler (1999). Aucune des autres alternatives examinées, y compris le modèle à prix fixes de Fuhrer et Moore (1995), ne génère de réponse satisfaisante. Elles sont notamment toutes incapables de reproduire une persistance suffisante de l'inflation. Ceci montre que dans les modèles à prix fixes, la structure de rigidité choisie im-porte autant pour le degré de persistance de l'inflation que la présence ou non de valeurs retardées de l'inflation dans la dynamique.