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Price stickiness, trend inflation, and output dynamics: a cross‐country analysis

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  • Hashmat Khan

Abstract

. Sticky price models based on menu costs predict that countries with high trend inflation should have (i) smaller impact effects of demand shocks on output and (ii) less persistent output fluctuations, relative to low‐trend inflation countries. These predictions are tested, controlling for changes in trend inflation, using a country‐specific approach. The results do not support the second prediction. That prediction is also not robust to a modified measure of trend inflation that excludes episodes of hyperinflation. These findings suggest that while price stickiness is important for understanding short‐run impact effects, real propagation mechanisms may drive persistence in output fluctuations. Viscosité des prix, inflation tendancielle, et dynamique de production: une analyse transversale. Les modèles de prix visqueux fondés sur des menus de coûts prédisent que les pays qui ont une tendance à une forte inflation devraient (i) avoir de plus petits impacts des chocs en provenance de la demande sur la production et (ii) engendrer des fluctuations de production moins persistantes, en comparaison avec ce qui se produit dans les pays à faible inflation. Des études antérieures (utilisant une approche en deux étapes) ont supporté ces résultats. Cet article utilise une approche qui est spécifique au pays et permet que le comportement des prix s’ajuste en réponse à des chocs dans la demande et à des changements dans l’inflation tendancielle, et donc prend mieux en compte la nature des données. Les résultats ne supportent pas la seconde hypothèse. De plus, cette prédiction n’est pas assez robuste face à une mesure modifiée de l’inflation moyenne pour exclure les épisodes d’hyperinflation quand on utilise l’approche en deux étapes. Ces résultats suggèrent que si la viscosité des prix est importante pour comprendre les effets à court terme, les mécanismes de propagation des impacts réels sont déterminants dans la persistance des fluctuations du niveau du produit.

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  • Hashmat Khan, 2004. "Price stickiness, trend inflation, and output dynamics: a cross‐country analysis," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 37(4), pages 999-1020, November.
    • Handle: RePEc:wly:canjec:v:37:y:2004:i:4:p:999-1020
    DOI: 10.1111/j.0008-4085.2004.00257.x
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    3. Rongrong Sun, 2014. "Nominal rigidity and some new evidence on the New Keynesian theory of the output-inflation tradeoff," International Economics and Economic Policy, Springer, vol. 11(4), pages 575-597, December.

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