Time-varying inflation target and price indexation in the New Keynesian DSGE model

Yunjong Eo | The University of Queensland

We investigate the underlying sources of inflation persistence based on a New Keynesian dynamic stochastic general equilibrium (DSGE) model. We propose a generalized New Keynesian Phillips curve for considering time-varying inflation target, potentially related to the medium-run inflation target of the central bank, and price indexation explicitly and estimate the New Keynesian small-scale DSGE model using postwar U.S. data for analyzing the sources of inflation persistence. We also study how the time-varying inflation target is adjusted in response to economic shocks and its welfare effect.