Models Of The Phillips Curve Vs Aggregate Supply...

Steven Tian Yi Zhang â€Å"Models of the Phillips curve/aggregate supply relationship based on flexible wages and prices fail to explain persistence in both the price level and inflation whereas those based on nominal rigidities readily explain both.â€Å" Discuss. The statement that â€Å"models of the Phillips curve/aggregate supply relationship based on flexible wages and prices fail to explain persistence in both the price level and inflation whereas those based on nominal rigidities readily explain both† is false. If we define â€Å"flexible† wages and prices as wages or prices that can be adjusted during one period for certain if the price-setters want to do so, then there is at least one model that expanded upon the the concept of â€Å"flexible† prices that explains persistence in both the price level and inflation. In this essay, I will first briefly introduce the Lucas Island Model, which is one of the first â€Å"flexible† price models and does not explain persistence in price level and inflation, then outline the sticky-price model by Calvo, outline the sticky-information model by Mankiw and Reis, and then using findings from ManKiw and Reis’s 2002 paper to argue that the sticky information model - which is still a â€Å"flexible† price model as we defined - explains both the price persistence and inflation persistence. 1. The Lucas Island Model There are a group of N islands, with one individual on each island. 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