Endogenous Inflation - The Role of Expectations and Strategic Interaction

Macroeconomic fluctuations always are the result of complex interactive processes. For this reason, our challenge of the widely used New Keynesian Phillips Curve builds on Taylor's (1979) version, which provides room for a richer sequential and interactive structure. We show that the Taylor model can be fruitfully complemented by the assumption of a �timeless� optimizing central bank. The macroeconomic equilibrium exhibits a significant degree of inflation inertia which is an endogenous economic result and not merely the consequence of exogenous persistence in aggregate real activity. This result is in stark contrast to earlier work by Kiley (2002) who found the New Keynesian Phillips curve to show more persistent reactions than its Taylor (1979) companion when being exposed to an exogenous monetary shocks.