Positive Trend Inflation and the Phillips Curve - A Tale of Two Slopes

42 Pages Posted: 22 Dec 2016

See all articles by Katrin Heinrichs

Katrin Heinrichs

FernUniversität in Hagen

Helmut Wagner

University of Hagen (Fernuniversitaet Hagen)

Date Written: October 1, 2016

Abstract

A small-scale New Keynesian model comes with considerable output losses from moderate positive steady-state inflation when the long-run output-inflation relationship is derived from the microeconomic equations.

We analyse:

1. whether allowing for parameter change with trend inflation might move the New Keynesian model's long-run Phillips curve (LRPC) towards superneutrality and hence bring about a more moderate output impact of steady-state inflation and,

2. whether this same parameter change also turns the linearised short-run New Keynesian Phillips Curve (NKPC) into the empirically found direction across different trend inflation rates.

We require the parameter change across trend inflation rates to be at least tentatively empirically justified. Two parameters meet our criteria: the usual suspect, the Calvo-parameter, and the intertemporal elasticity of substitution.

Keywords: New Keynesian Phillips curve, positive trend inflation, inflation dependent parameters, long run Phillips curve

JEL Classification: E31, E52

Suggested Citation

Heinrichs, Katrin and Wagner, Helmut, Positive Trend Inflation and the Phillips Curve - A Tale of Two Slopes (October 1, 2016). Available at SSRN: https://ssrn.com/abstract=2888366 or http://dx.doi.org/10.2139/ssrn.2888366

Katrin Heinrichs (Contact Author)

FernUniversität in Hagen ( email )

Universitätsstr. 11 (TGZ)
Chair of Macroeconomics
58084 Hagen
Germany

Helmut Wagner

University of Hagen (Fernuniversitaet Hagen) ( email )

Universitätsstrasse 41
Feithstrathe 140
D-58084 Hagen
Germany
011-49-2331-987-2640 (Phone)
011-49-2331-987-391 (Fax)

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