Backward-looking indexation, credibility and inflation persistence

Inflation persistence is a stylized fact after disinflation. Standard stagg ered-prices models show very Little or no inflation persistence and, hence, are of little use when inflation is sticky. In this paper, I present a mod el that, on the one hand, is consistent with the evidence of sticky inflati on and, on the other, can be directly incorporated into modem intertemporal optimizing models. The model modifies Calvo's [Calvo, G., 1983a. Staggered contracts and exchange rate policy. In: J.A. Frenkel (Ed.), Exchange Rates and International Economics, University of Chicage Press, Chicago, IL; Cal vo, G., 1983b. Staggered wages in a utility maximization framework, Journal of Monetary Ecomomics 12(3), 383-393] exclusively forward-looking model an d includes a backward-looking component. It encompasses the two extreme cas es of purely forward and backward-looking price setting. I show how the mod el can be used in open economy stabilization programs. This is not the firs t model including a form of backward indexation in a staggered-prices setti ng. However, it has the advantage of keeping the analytical elegance of the Calvo model while enhancing its dynamics. (C) 2001 Elsevier Science B.V. A ll rights reserved.