We derive a Phillips curve equation from the dynamic stochastic general equilibrium (DSGE) model with state-dependent pricing developed by Dotsey et al. [1999. State-dependent pricing and the general equilibrium dynamics of money and output. Quarterly Journal of Economics 114, 655-690]. This state-dependent Phillips curve encompasses the new Keynesian Phillips curve (NKPC) based on Calvo-type price setting as a special case. We analyze the effect of the state-dependent terms (that is, the variations in the distributions of price vintages) on inflation persistence, and we examine whether the hybrid NKPC (that is, the NKPC extended by a lagged inflation term) can adequately describe inflation dynamics generated in a calibrated state-dependent pricing economy.

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Journal of Monetary Economics
Department of Economics

Bakhshi, H. (Hasan), Khan, H.U, & Rudolf, B. (Barbara). (2007). The Phillips curve under state-dependent pricing. Journal of Monetary Economics, 54(8), 2321–2345. doi:10.1016/j.jmoneco.2007.07.001