Files
Abstract
In this paper, we build a model that incorporates a backward-looking component to the
exclusively forward-looking staggered prices model of Calvo (1983). The objective of this
formulation is to include the effect of the history of high inflation on the price formation,
reflected in the existence of widespread backward-looking indexation (-de facto or de jure-).
Thus, the model is able to isolate the effects of history in price setting from the genuinely
forward-looking lack of credibility arising from the intertemporal inconsistency between
fiscal and monetary policy. One remarkable feature of the model is that it remains
analytically tractable despite its enhanced dynamics. When used to simulate, the model
replicates inflation persistence and real appreciation. Immediate inflation convergence is not
achievable even if the economy's fundamentals would say so.