Endogenous Price Stickiness, Trend Inflation, and the New Keynesian Phillips Curve

Bank of England Working Paper No. 191

31 Pages Posted: 2 Jul 2004

See all articles by Hasan Bakhshi

Hasan Bakhshi

Bank of England - Monetary Analysis

Pablo Burriel-Llombart

Bank of England - Structural Economic Analysis Division

Hashmat Khan

Bank of England - Structural Economic Analysis Division

Barbara Rudolf

Swiss National Bank

Date Written: June 2003

Abstract

For standard calibration, this paper shows that the optimal price, in a model with Calvo form of price stickiness and strategic complementarities, is only defined for annualised trend inflation rates of under 5.5%. This critical inflation rate is below the average inflation rate over recent decades. Furthermore, over the range for which the optimal price is defined, the slope of the New Keynesian Phillips curve generated by this model is decreasing in trend inflation. That contradicts the stylised fact that Phillips curves are flatter in low-inflation environments. Substituting endogenous price stickiness for the Calvo form of time-dependent pricing can help avoid these implications.

Keywords: Trend inflation, strategic complementarity, sticky prices, Phillips curve

JEL Classification: E31

Suggested Citation

Bakhshi, Hasan and Burriel-Llombart, Pablo and Khan, Hashmat and Rudolf, Barbara, Endogenous Price Stickiness, Trend Inflation, and the New Keynesian Phillips Curve (June 2003). Bank of England Working Paper No. 191, Available at SSRN: https://ssrn.com/abstract=492043 or http://dx.doi.org/10.2139/ssrn.492043

Hasan Bakhshi

Bank of England - Monetary Analysis ( email )

Threadneedle Street
London EC2R 8AH
United Kingdom
020 7601 5996 (Phone)

Pablo Burriel-Llombart

Bank of England - Structural Economic Analysis Division ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom
020 7601 3023 (Phone)

Hashmat Khan (Contact Author)

Bank of England - Structural Economic Analysis Division ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Barbara Rudolf

Swiss National Bank ( email )

Borsenstrasse 15
CH-8022 Zurich
Switzerland

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