Summary
This chapter reconsiders the standard microfoundations of the new-Keynesian-Phillips curve. It argues that with heterogeneous and boundedly rational firms, the expectational variable in the Phillips curve refers to a longer time horizon than the next period, and is updated in a gradual manner. However, firms are less naive than adaptive expectations; they also take output data into account, as well as the credibility of the central bank. At the macroeconomic level, the ideas about such an adjustment process are specified in the concept of an “adaptive inflation climate.” Exploratory estimations of the process where the inflation climate is proxied by a survey measure of expectations yield reasonable results that are supportive of this approach.
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Franke, R. (2007). A Sophisticatedly Simple Alternative to the New-Keynesian Phillips Curve. In: Asada, T., Ishikawa, T. (eds) Time and Space in Economics. Springer, Tokyo. https://doi.org/10.1007/978-4-431-45978-1_1
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DOI: https://doi.org/10.1007/978-4-431-45978-1_1
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