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Staggered prices and trend inflation: some nuisances

Listed author(s):
  • Guido Ascari

    (Department of Economics & 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://econwpa.repec.org/eps/mac/papers/0404/0404029.pdf
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Paper provided by EconWPA in its series Macroeconomics with number 0404029.

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Date of creation: 27 Apr 2004
Handle: RePEc:wpa:wuwpma:0404029
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  12. Richard Clarida & Jordi Galí & Mark Gertler, 1997. "The science of monetary policy: A new Keynesian perspective," Economics Working Papers 356, Department of Economics and Business, Universitat Pompeu Fabra, revised Apr 1999.
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