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Research output: Contribution to Journal/Magazine › Journal article › peer-review
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TY - JOUR
T1 - Trend Inflation and Firms Price-Setting
T2 - Rotemberg Versus Calvo
AU - Ascari, G.
AU - Rossi, L.
PY - 2012/9/30
Y1 - 2012/9/30
N2 - 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.
AB - 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.
KW - comparative study
KW - economic analysis
KW - industrial enterprise
KW - inflation
KW - modeling
KW - pricing policy
U2 - 10.1111/j.1468-0297.2012.02517.x
DO - 10.1111/j.1468-0297.2012.02517.x
M3 - Journal article
VL - 122
SP - 1115
EP - 1141
JO - Economic Journal
JF - Economic Journal
SN - 0013-0133
IS - 563
ER -