The sticky-price model of aggregate fluctuations implies that countries with high trend inflation rates should exhibit less-persistent output fluctuations than countries with low trend inflation. I conduct a cross-country analysis of output persistence and inflation that takes into account the within-country time variation in trend inflation. My results do not support the implication. The results suggest that further research is needed before models based on nominal price stickiness can offer a complete microfoundation for persistent effects of aggregate demand shocks.

Also published as:

Canadian Journal of Economics (0008-4085)
November 2004. Vol. 37, Issue 4, pp. 999-1020