The Inflation Persistence of Staggered Contracts

One of the criticisms routinely advanced against models with staggered contracts is their inability to generate inflation persistence. This paper finds that staggered contracts a la Taylor are, in fact, capable of reproducing the inflation persistence implied by U.S. data. Following Fuhrer and Moore, I capture the moments that the model needs to replicate by using the correlograms from a small vector autoregression (VAR). I estimate the contract parameters using the method of maximum likelihood. The correlogram of inflation for the contract model is very close to the correlogram from the VAR. By the same metric, Taylor contracts fare poorly in reproducing the comovements of inflation and output.