Alternative Sources of the Lag Dynamics of Inflation

This paper discusses four potential sources of lag dynamics in inflation: non-rational behavior, staggered contracting, frictions on price adjustment, and shifts in the long-run inflation anchor of agent expectations (the perceived inflation target). Expressions for inflation dynamics from structural models which admit these different sources of lag dynamics are contrasted. Empirical results are provided for the U.S. and Canada. The empirical evidence suggests that shifts in the perceived inflation target of monetary policy, less than full policy credibility, and inflation stickiness have all been important features of the historical behavior of inflation