A Phillips Curve with an Ss Foundation

We develop an analytically tractable Phillips curve based on state-dependent pricing. We consider a local approximation around a zero inflation steady state and introduce infrequent idiosyncratic shocks. The resulting Phillips curve is a simple variant of the conventional time-dependent Calvo formulation with important differences. First, the model is able to match the micro evidence on the magnitude and timing of price adjustments. Second, our state-dependent model exhibits greater flexibility in the aggregate price level than the time-dependent model. With real rigidities present, however, our model can exhibit nominal stickiness similar to a conventional time-dependent model. (c) 2008 by The University of Chicago. All rights reserved..