- Economics
I investigate a generalized form of the Lucas (1972, 1973) Phillips curve, that allows different firms to learn aggregate information at different speeds, in otherwise standard textbook new- Keynesian models. This Phillips curve helps to reconcile the sharp divergence between the standard model on the one hand and the beliefs of most policy analysts and the available evidence on the other. In the standard model, inflation and output rise after interest rates rise, with only the possibility of a one-time downward jump. With the generalized Lucas Phillips curve, a small initial disinflation builds up before turning around. With long-term debt, higher interest rates can temporarily lower future inflation with no change in fiscal policy. The model preserves the desirable long-run stability and neutrality of the standard model. The model is tractable, with textbook simplicity and analytic solutions. Lagged inflation in the Phillips curve does not produce a comparable result.
