Positive Trend Inflation and the Phillips Curve - A Tale of Two Slopes
42 Pages Posted: 22 Dec 2016
Date Written: October 1, 2016
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.
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: Suggested Citation