Trend Inflation, Firm-Specific Capital, and Sticky Prices
27 Pages Posted: 6 Dec 2012
Date Written: 2005
Abstract
Early empirical studies of the New Keynesian Phillips Curve imply implausibly high levels of price stickiness for standard monetary models with Calvo-type nominal rigidities. More recently researchers have found that the addition of real rigidities through firm-specific capital adjustment costs allows for a reinterpretation of estimated New Keynesian Phillips Curves that makes the implied price stickiness more plausible. A common assumption in the literature on economies with Calvo-type nominal rigidities is that the economy fluctuates around a zero-inflation steady state. While average inflation has been low in the recent past, it certainly has not been zero. We study the impact of nonzero average inflation in an alternative model of nominal rigidities, namely Taylor-type staggered pricing with firm-specific capital adjustment costs. We find that in this alternative framework, the widely accepted Taylor principle is no longer sufficient to guarantee that monetary policy does not become a source of unnecessary fluctuations. In particular, we find that for low values of average inflation, a central bank has to increase nominal interest rates by substantially more than one-for-one in response to an increase of inflation. This finding suggests caution in interpreting models that impose the zero steady-state inflation rate assumption.
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy
By Lawrence J. Christiano, Martin Eichenbaum, ...
-
Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy
By Lawrence J. Christiano, Martin Eichenbaum, ...
-
An Estimated Stochastic Dynamic General Equilibrium Model of the Euro Area
By Frank Smets and Rafael Wouters
-
An Estimated Dynamic Stochastic General Equilibrium Model of the Euro Area
By Frank Smets and Rafael Wouters
-
Optimal Monetary Policy with Staggered Wage and Price Contracts
By Christopher J. Erceg, Dale W. Henderson, ...
-
Shocks and Frictions in Us Business Cycles: A Bayesian DSGE Approach
By Frank Smets and Rafael Wouters
-
Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach
By Frank Smets and Rafael Wouters
-
Shocks and Frictions in U.S. Business Cycles: A Bayesian DSGE Approach
By Frank Smets and Rafael Wouters
-
Resuscitating Real Business Cycles
By Robert G. King and Sergio T. Rebelo
-
Has Monetary Policy Become More Effective?
By Jean Boivin and Marc P. Giannoni