Research Discussion Papers, Bank of Finland
Staggered prices and trend inflation: some nuisances
Abstract: 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.
Keywords: inflation; staggered price/wages; (follow links to similar papers)
JEL-Codes: E24; E32; (follow links to similar papers)
46 pages, November 11, 2003
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