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Endogenous Price Stickiness, Trend Inflation, and Macroeconomic Stability

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  • TAKUSHI KUROZUMI

Abstract

Previous studies show that higher trend inflation is more likely to induce indeterminacy of equilibrium in sticky‐price models based on micro evidence that each period a fraction of prices is kept unchanged. This paper demonstrates that when the degree of price stickiness is endogenously determined in a Calvo model, indeterminacy caused by higher trend inflation is less likely. A key factor for determinacy is the long‐run inflation elasticity of output implied by the New Keynesian Phillips curve. This elasticity declines substantially with higher trend inflation in the case of exogenously given price stickiness, whereas in the case of endogenous price stickiness the decline in the elasticity is mitigated because higher trend inflation leads to a higher probability of price adjustment.

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  • Takushi Kurozumi, 2016. "Endogenous Price Stickiness, Trend Inflation, and Macroeconomic Stability," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 48(6), pages 1267-1291, September.
    • Handle: RePEc:wly:jmoncb:v:48:y:2016:i:6:p:1267-1291
    DOI: 10.1111/jmcb.12333
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    References listed on IDEAS

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    Cited by:

    1. Yasuo Hirose & Takushi Kurozumi & Willem Van Zandweghe, 2015. "Monetary policy, trend inflation, and the Great Moderation: an alternative interpretation: comment based on system estimation," Research Working Paper RWP 15-17, Federal Reserve Bank of Kansas City.
    2. Yasufumi Gemma & Takushi Kurozumi & Mototsugu Shintani, 2023. "Trend Inflation and Evolving Inflation Dynamics:A Bayesian GMM Analysis," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 51, pages 506-520, December.
    3. Yasuo Hirose & Takushi Kurozumi & Wille Van Zandweghe, 2023. "Inflation Gap Persistence, Indeterminacy, and Monetary Policy," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 51, pages 867-887, December.
    4. David Staines, 2023. "Stochastic Equilibrium the Lucas Critique and Keynesian Economics," Papers 2312.16214, arXiv.org.
    5. Ishise, Hirokazu, 2022. "Optimal long-run inflation rate in an open economy," European Economic Review, Elsevier, vol. 148(C).
    6. Kurozumi, Takushi & Van Zandweghe, Willem, 2017. "Trend Inflation And Equilibrium Stability: Firm-Specific Versus Homogeneous Labor," Macroeconomic Dynamics, Cambridge University Press, vol. 21(4), pages 947-981, June.
    7. Kimura, Takeshi & Kurozumi, Takushi, 2010. "Endogenous nominal rigidities and monetary policy," Journal of Monetary Economics, Elsevier, vol. 57(8), pages 1038-1048, November.
    8. Yasuo Hirose & Takushi Kurozumi & Willem Van Zandweghe, 2020. "Monetary Policy and Macroeconomic Stability Revisited," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 37, pages 255-274, July.
    9. Guido Ascari & Argia M. Sbordone, 2014. "The Macroeconomics of Trend Inflation," Journal of Economic Literature, American Economic Association, vol. 52(3), pages 679-739, September.
    10. Sohei Kaihatsu & Mitsuru Katagiri & Noriyuki Shiraki, 2017. "Phillips Curve and Price-Change Distribution under Declining Trend Inflation," Bank of Japan Working Paper Series 17-E-5, Bank of Japan.
    11. Qazi Haque, 2022. "Monetary Policy, Inflation Target, and the Great Moderation: An Empirical Investigation," International Journal of Central Banking, International Journal of Central Banking, vol. 18(4), pages 1-52, October.
    12. Volker Hahn, 2022. "Price Dispersion and the Costs of Inflation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 54(2-3), pages 459-491, March.
    13. Takushi Kurozumi & Willem Van Zandweghe, 2014. "A pitfall of expectational stability analysis," Research Working Paper RWP 14-7, Federal Reserve Bank of Kansas City.
    14. Qazi Haque, 2017. "Monetary Policy, Target Inflation and the Great Moderation: An Empirical Investigation," School of Economics and Public Policy Working Papers 2017-10, University of Adelaide, School of Economics and Public Policy.
    15. Takushi Kurozumi & Willem Van Zandweghe, 2016. "Kinked Demand Curves, the Natural Rate Hypothesis, and Macroeconomic Stability," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 20, pages 240-257, April.

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