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 -