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Trend Inflation and Firms Price-Setting: Rotemberg Versus Calvo

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<mark>Journal publication date</mark>30/09/2012
<mark>Journal</mark>Economic Journal
Issue number563
Number of pages27
Pages (from-to)1115-1141
Publication StatusPublished
Early online date9/03/12
<mark>Original language</mark>English


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.