Trend Inflation and Firms Price-Setting:Rotemberg Versus Calvo

Ascari, G. and Rossi, L. (2012) Trend Inflation and Firms Price-Setting:Rotemberg Versus Calvo. Economic Journal, 122 (563). pp. 1115-1141. ISSN 0013-0133

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We compare the Calvo and Rotemberg price-setting mechanisms in a New Keynesian model with trend inflation. We show that: the long-run relationship between inflation and output is positive in Rotemberg and negative in Calvo; the dynamics of the two models differ even to a first-order approximation; positive trend inflation enlarges the determinacy region in the Rotemberg model, whereas it shrinks it in the Calvo model; the responses of output and inflation to technology shocks are amplified by trend inflation in Calvo, whereas they are dampened in Rotemberg; the two models imply differing non-linear adjustments after a disinflation.

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Economic Journal
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08 Oct 2021 12:45
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22 Nov 2022 10:42