Adaptive Learning and Inflation Dynamics in a Flexible Price Model

In most of the recent macroeconomics literature, the sticky reaction of prices in response to changes in aggregate conditions has been modelled following the highly influential contribution of Calvo (1983). However, this approach has difficulties in accounting for some well-established stylized facts, like the sluggish and delayed response of inflation to demand shocks, and the positive correlation between real output and the rate of change of inflation. In this paper, we will investigate the possibility of a simple flexible prices and monopolistic competitive model to match this features, when the expectations of the firms are formed following the adaptive learning literature