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Staggered prices and trend inflation: some nuisances

  • Ascari, Guido

    ()

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

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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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
Contact details of provider: Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
Web page: http://www.suomenpankki.fi/en/
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