Kinked demand curves, the natural rate hypothesis, and macroeconomic stability

Variable Elasticity Demand and Inflation Persistence

“…Kurozumi and Van Zandweghe (2016) show that the variable elasticity demand curves can cause steadystate output to become an increasing function of trend in ‡ation, in contrast with the case of constant elasticity demand curves. This is because the variable elasticity demand curves alter the e¤ects of trend in ‡ation on the two components of steady-state output, the steady-state average markup and the steady-state relative price distortion.…”

Trend Inflation and an Empirical Test of Real Rigidities

“…4 Several papers have already focused on the interaction between trend inflation and real rigidities. Kurozumi and Zandweghe (2016) show that the kinked-demand curve can mitigate the effect of positive trend inflation in inducing equilibira indeterminacy in the New Keynesian model with a Taylor rule. Bakhshi et al (2007) show that real rigidity due to firm-specific factors has the opposite effect and leads to larger regions of the parameter space resulting in equilibria indeterminacy.…”

Inflation Gap Persistence, Indeterminacy, and Monetary Policy

“…Second, the estimated model shows that the Fed's change from a passive to an active policy response to the inflation gap or a decrease in firms' probability of price change can fully account for the decline in inflation gap persistence by ruling out indeterminacy that 5 See, e.g., Eichenbaum and Fisher (2007), Smets and Wouters (2007), and Kurozumi and Van Zandweghe (2016). 6 Two popular assumptions for the presence of lagged inflation in NKPCs used in the literature are price indexation to past inflation (Christiano et al (2005)) and backward-looking rule-of-thumb price-setters (Galí and Gertler (1999)).…”