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TREND INFLATION AND EQUILIBRIUM STABILITY: FIRM-SPECIFIC VERSUS HOMOGENEOUS LABOR

Published online by Cambridge University Press:  08 August 2016

Takushi Kurozumi  and
Willem Van Zandweghe
Takushi Kurozumi
Affiliation:
Bank of Japan
Willem Van Zandweghe*
Affiliation:
Federal Reserve Bank of Kansas City
*
Address correspondence to: Willem Van Zandweghe, Research Department, Federal Reserve Bank of Kansas City, 1 Memorial Drive, Kansas City, MO 64198, USA; e-mail: willem.vanzandweghe@kc.frb.org.
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Abstract

In sticky price models based on micro evidence that each period a fraction of prices are kept unchanged, recent studies reach the qualitatively equivalent conclusion that higher trend inflation is a more serious source of indeterminacy of rational expectations equilibrium, regardless of whether labor is firm-specific or homogeneous. This paper shows that the model with firm-specific labor is more susceptible to indeterminacy induced by high trend inflation than the model with homogeneous labor, because these two different specifications of labor lead to distinct representations of inflation dynamics. In addition, the model with firm-specific labor is more susceptible to expectational instability of the equilibrium caused by high trend inflation.

Keywords

Trend InflationFirm-Specific Versus Homogeneous LaborInflation DynamicsEquilibrium DeterminacyExpectational Stability
Type
Articles
Information
Macroeconomic Dynamics , Volume 21 , Issue 4 , June 2017 , pp. 947 - 981
Copyright
Copyright © Cambridge University Press 2016 

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Footnotes

The authors are grateful to the editor William Barnett, Olivier Coibion, Andrew Foerster, an associate editor, two anonymous referees, and participants at the Midwest Macroeconomics Meetings 2012 and a seminar at the Federal Reserve Bank of Kansas City for comments and discussions. The views expressed herein are those of the authors and should not be interpreted as those of the Bank of Japan, the Federal Reserve Bank of Kansas City, or the Federal Reserve System.

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