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Trend inflation and an empirical test of real rigidities

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  • Marenčák, Michal

Abstract

Positive trend inflation resolves the observational equivalence of various sources of real rigidities which are first-order equivalent under zero trend inflation. This paper builds on this observation to assess the empirical performance of three widely used types of real rigidities — firm-specific capital, firm-specific wages and a kinked-demand curve — in matching the U.S. inflation dynamics. Firm-specific wages outperform the kinked-demand curve and firm-specific capital in terms of empirical fit. We document that positive trend inflation might reduce the ability of firm-specific factors to prolong the real affects of monetary disturbances.

Suggested Citation

  • Marenčák, Michal, 2022. "Trend inflation and an empirical test of real rigidities," Department of Economics Working Paper Series 323, WU Vienna University of Economics and Business.
    • Handle: RePEc:wiw:wus005:8644
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    Keywords

    trend inflation; real rigidity; Calvo pricing; price dispersion; monetary policy; inflation persistence;
    All these keywords.

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