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Endogenous Price Stickiness, Trend Inflation, and Macroeconomic Stability
Author(s) -
KUROZUMI TAKUSHI
Publication year - 2016
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/jmcb.12333
Subject(s) - economics , determinacy , new keynesian economics , inflation (cosmology) , keynesian economics , indeterminacy (philosophy) , phillips curve , elasticity (physics) , econometrics , price level , monetary economics , monetary policy , macroeconomics , mathematics , mathematical analysis , physics , materials science , quantum mechanics , theoretical physics , composite material
Previous studies show that higher trend inflation is more likely to induce indeterminacy of equilibrium in sticky‐price models based on micro evidence that each period a fraction of prices is kept unchanged. This paper demonstrates that when the degree of price stickiness is endogenously determined in a Calvo model, indeterminacy caused by higher trend inflation is less likely. A key factor for determinacy is the long‐run inflation elasticity of output implied by the New Keynesian Phillips curve. This elasticity declines substantially with higher trend inflation in the case of exogenously given price stickiness, whereas in the case of endogenous price stickiness the decline in the elasticity is mitigated because higher trend inflation leads to a higher probability of price adjustment.