Trend inflation, sticky prices, and expectational stability

Journal of Economic Dynamics and Control, 2014, vol. 42, issue C, 175-187

Abstract: Micro evidence indicates that each period a fraction of prices is kept unchanged under a positive trend inflation rate. In a sticky price model based on this evidence, recent research shows that high trend inflation is a serious cause for indeterminacy of rational expectations equilibrium under the Taylor rule. This paper examines implications of trend inflation for expectational stability of the equilibrium. An empirically plausible calibration of the model demonstrates that a fundamental rational expectations equilibrium is likely to be expectationally stable even in cases of indeterminacy induced by high trend inflation.

Keywords: Trend inflation; Sticky price; Indeterminacy; Expectational stability; Least-squares learnability (search for similar items in EconPapers)
JEL-codes: E31 E52 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (17)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:42:y:2014:i:c:p:175-187

DOI: 10.1016/j.jedc.2014.04.001

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