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Staggered prices and trend inflation: some nuisances

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  • Ascari, Guido

    ()
    (Department of Economics and Quantitative Methods, University of Pavia)

Abstract

Most of the papers in the sticky-price literature are based on a log-linearization around the zero inflation steady state, a simplifying but counterfactual assumption. This paper shows that when trend inflation is considered, both the long-run and the short-run properties of DGE models based on the Calvo staggered price model change dramatically. It follows that results obtained by models log-linearized around a zero inflation steady state are quite misleading. Furthermore, the same is not true for models based on the Taylor staggered price model, which is robust to changes in trend inflation. As a conclusion, the Taylor model is to be preferred, unless one is willing to index nominal variables.

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File URL: http://www.suomenpankki.fi/en/julkaisut/tutkimukset/keskustelualoitteet/Documents/0327.pdf
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Bibliographic Info

Paper provided by Bank of Finland in its series Research Discussion Papers with number 27/2003.

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Length: 46 pages
Date of creation: 11 Nov 2003
Date of revision:
Handle: RePEc:hhs:bofrdp:2003_027

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Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
Web page: http://www.suomenpankki.fi/en/
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Keywords: inflation; staggered price/wages;

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References

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  1. Jordi Gali & Mark Gertler, 2000. "Inflation Dynamics: A Structural Econometric Analysis," NBER Working Papers 7551, National Bureau of Economic Research, Inc.
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  9. Clarida, Richard & Galí, Jordi & Gertler, Mark, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," CEPR Discussion Papers 2139, C.E.P.R. Discussion Papers.
  10. V.V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2000. "Can Sticky Price Models Generate Volatile and Persistent Real Exchange Rates?," NBER Working Papers 7869, National Bureau of Economic Research, Inc.
  11. Ascari, Guido & Rankin, Neil, 2002. "Staggered wages and output dynamics under disinflation," Journal of Economic Dynamics and Control, Elsevier, vol. 26(4), pages 653-680, April.
  12. Ireland, Peter N., 1997. "A small, structural, quarterly model for monetary policy evaluation," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 47(1), pages 83-108, December.
  13. Ascari, Guido, 2000. "Optimising Agents, Staggered Wages and Persistence in the Real Effects of Money Shocks," Economic Journal, Royal Economic Society, vol. 110(465), pages 664-86, July.
  14. Alexander L. Wolman, 1999. "Sticky prices, marginal cost, and the behavior of inflation," Economic Quarterly, Federal Reserve Bank of Richmond, issue Fall, pages 29-48.
  15. Olivier Jeanne, 1997. "Generating Real Persistent Effects of Monetary Shocks: How Much Nominal Rigidity Do We Really Need?," NBER Working Papers 6258, National Bureau of Economic Research, Inc.
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  28. repec:cup:macdyn:v:2:y:1998:i:3:p:383-400 is not listed on IDEAS
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  1. Deriving the New Keynesian Phillips Curve (NKPC) with Calvo pricing
    by John Barrdear in John Barrdear on 2009-02-18 10:15:32
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