The New Keynesian Phillips curve under trend inflation and strategic complementarity

Bakhshi, Hasan; Khan, Akhtar S.; Burriel-Llombart, Pablo; Rudolf, Barbara

doi:10.1016/j.jmacro.2005.03.004

Cited by 41 publications

(36 citation statements)

References 26 publications

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“…For the steady state average markup to exist one needs the convergence condition that < 1 ( 1) which is 5.8% for the baseline parameter values. This upper limit accords well with Bakshi et al (2007) although their model is very di¤erent from ours. 6 The appendix shows that @ n =@ > 0 as long as > 1.…”

Section: Calvo Modelsupporting

confidence: 90%

Partial inflation indexation and long-run inflation targeting in a growing economy: A comparison of Calvo and Rotemberg pricing models

Basu

Sarkar

2016

Journal of Macroeconomics

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Use policyThe full-text may be used and/or reproduced, and given to third parties in any format or medium, without prior permission or charge, for personal research or study, educational, or not-for-prot purposes provided that:• a full bibliographic reference is made to the original source • a link is made to the metadata record in DRO • the full-text is not changed in any way The full-text must not be sold in any format or medium without the formal permission of the copyright holders.Please consult the full DRO policy for further details. AbstractThe observed 2% long run in ‡ation target in most developed industrial nations is in variance with the zero or negative optimal in ‡ation rates predicted by prominent monetary theories. Using a calibrated simple New-Keynesian model with endogenous growth and nominal rigidity, we compare two price setting environments of Calvo (1983) and Rotemberg (1982). In our growth model, the steady state welfare maximizing in ‡ation takes into account the growth e¤ect as well as the price distortionary e¤ects of in ‡ation. The long-run welfare maximizing trend in ‡ation could be positive in economies with nominal rigidity in the form of partial in ‡ation indexation and price stickiness. A higher degree of in ‡ation indexation lowers the steady state price distortion in the Calvo model and steady state price adjustment cost in Rotemberg model and raises the long run optimal in ‡ation. Since the productive ine¢ ciency caused by partial in ‡ation indexation is higher in Calvo economy compared to Rotemberg, the long run optimal trend in ‡ation is higher in Rotemberg than in Calvo. In both models, a two percent long run in ‡ation target is attainable for a reasonable degree of in ‡ation indexation.

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Section: Calvo Modelsupporting

confidence: 90%

Partial inflation indexation and long-run inflation targeting in a growing economy: A comparison of Calvo and Rotemberg pricing models

Basu

Sarkar

2016

Journal of Macroeconomics

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“…On a related note, Ascari (2004) and Bakhshi, Kahn, Burriel-Llombart, and Rudolf (2007) have pointed out that the Calvo model implies an upper bound of trend inflation above which the model is not well-defined.…”

Section: An Asymmetric Trend Inflation Processmentioning

confidence: 99%

Welfare costs of shifting trend inflation

Nakata

2014

Journal of Macroeconomics

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This paper studies the welfare consequences of exogenous variations in trend inflation in a New Keynesian economy. Consumption and leisure respond asymmetrically to a rise and a decline in trend inflation. As a result, an increase in the variance of shocks to the trend inflation process decreases welfare not only by increasing the volatilities of consumption and leisure, but also by decreasing their average levels. I find that the welfare cost of drifting trend inflation is modest and that it comes mainly from reduced average levels of consumption and leisure, not from their increased volatilities. JEL: C63, E31, E52

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“…The last three components are commonly referred to as 'strategic complementarity' or 'real rigidity' channels. 1 Both nominal and real rigidities are known to be important in assessing the size of the 'slope' of the new Keynesian Phillips curve with respect to marginal costs. They have been analyzed in theoretical works and explored in empirical studies aiming at reconciling estimated 'slopes' with reasonable degrees of nominal rigidity.…”

Section: Channels Of Globalization Effects On Inflationmentioning

confidence: 99%

“…To do this I borrow from the new trade literature, and in particular from a recent contribution by Melitz and Ottaviano (2005), who present a model of trade with monopolistic competition and firm heterogeneity to study the effect of trade liberalization on productivity 1 See Woodford (2003) ch. 3.…”

Section: Channels Of Globalization Effects On Inflationmentioning

confidence: 99%

Globalization and Inflation Dynamics: The Impact of Increased Competition

Sbordone

2008

SSRN Journal

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractThis paper analyzes the potential effect of global market competition on inflation dynamics. It does so through the lens of the Calvo model of staggered price setting, which implies that inflation depends on expected future inflation and a measure of marginal costs. I modify the assumption of a constant elasticity of demand, standard in this model, to provide a channel through which an increase in the number of traded goods may affect the degree of strategic complementarity in price setting and hence alter the dynamic response of inflation to marginal costs. I first discuss the behavior of the variables that drive the impact of trade openness on this response, and then I evaluate whether an increase in the variety of traded goods of the magnitude observed in the United States in the 1990s might have a significant quantitative impact. I find that it is difficult to argue that such an increase in trade would have generated a sufficiently large increase in U.S. market competition to reduce the slope of the inflation-marginal cost relation.

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The New Keynesian Phillips curve under trend inflation and strategic complementarity

Cited by 41 publications

References 26 publications

Partial inflation indexation and long-run inflation targeting in a growing economy: A comparison of Calvo and Rotemberg pricing models

Partial inflation indexation and long-run inflation targeting in a growing economy: A comparison of Calvo and Rotemberg pricing models

Welfare costs of shifting trend inflation

Globalization and Inflation Dynamics: The Impact of Increased Competition

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