Are Prices Sticky or just Backward-Looking? (Preliminary)

This paper contributes to the address of two questions emphasized in the recent literature on models of the role of monetary policy in the economy. The …rst concerns the consistency of the New Keynesian sticky price model with the high degree of persistence in in‡ation. The second concerns the possibility that perceived di¤erences in the behavioral relationship between in‡ation, interest rates, and real variables across time may be attributable to a switch from “passive” to “active” monetary policy after 1979. I …rst show how passive policy can have very di¤erent implications with respect to the persistence of in‡ation. I then estimate parameters of a fairly standard model in this class; and I …nd little evidence against the hypothesis that monetary policy has been passive over the entire period 1959-2001. Moreover, my …ndings indicate little role for price stickiness. I suggest an interpretation of the real volatility of the early 1980s somewhat di¤erent from the mainstream view.