We study the relation between inflation and real activity over the business cycle. We employ a Trend-Cycle VAR model to control for low-frequency movements in inflation, unemployment, and growth that are pervasive in the post-WWII period. We show that cyclical fluctuations of inflation are...

We introduce "smooth diagnosticity." Under smooth diagnosticity, agents over-react to new information defined as the difference between the current information set and a previous information set. Since new information typically changes not just the conditional mean, but also the conditional...