A Phillips Curve with an Ss Foundation

We develop an analytically tractable Phillips curve based on state‐dependent pricing. We consider a local approximation around a zero inflation steady state and introduce infrequent idiosyncratic shocks. The resulting Phillips curve is a simple variant of the conventional time‐dependent Calvo formulation with important differences. First, the model is able to match the micro evidence on the magnitude and timing of price adjustments. Second, our state‐dependent model exhibits greater flexibility in the aggregate price level than the time‐dependent model. With real rigidities present, however, our model can exhibit nominal stickiness similar to a conventional time‐dependent model.