The authors study the macroeconomic effects of non-zero trend inflation in a simple dynamic stochastic general-equilibrium model with sticky prices. They show that trend inflation leads to a substantial reduction in the stochastic means of output, consumption, and employment. It also leads to an increase in the variability and persistence of most aggregates. Price dispersion across firms unambiguously increases the welfare costs of inflation. The effects hold qualitatively no matter how sticky prices are modelled, but they are quantitatively much stronger under Calvo pricing.

Published In:

Journal of Money, Credit and Banking (0022-2879)
October 2007. Vol. 39, Iss. 7, pp. 1821-38