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Staggered prices and trend inflation: some nuisances

  • 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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Paper provided by EconWPA in its series Macroeconomics with number 0404029.

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Date of creation: 27 Apr 2004
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Handle: RePEc:wpa:wuwpma:0404029
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  27. Hasan Bakhshi & Pablo Burriel-Llombart, 2003. "Endogenous Price Stickiness, Trend Inflation, and the New Keynesian Phillips Curve," Computing in Economics and Finance 2003 12, Society for Computational Economics.
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