Hostname: page-component-78c5997874-t5tsf Total loading time: 0 Render date: 2024-11-11T19:34:33.721Z Has data issue: false hasContentIssue false
  • English
  • Français

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.
Get access Rights & Permissions [Opens in a new window]

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 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

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.

References

REFERENCES

Altig, David, Christiano, Lawrence J., Eichenbaum, Martin, and Lindé, Jesper (2011) Firm-specific capital, nominal rigidities and the business cycle. Review of Economic Dynamics 14 (2), 225–247.CrossRefGoogle Scholar
Arias, Jonas (2013) Determinacy Properties of Medium-Sized New-Keynesian Models with Trend Inflation. Mimeo, Duke University.Google Scholar
Ascari, Guido and Ropele, Tiziano (2007) Optimal monetary policy under low trend inflation. Journal of Monetary Economics 54 (8), 2568–2583.CrossRefGoogle Scholar
Ascari, Guido and Ropele, Tiziano (2009) Trend inflation, Taylor principle and indeterminacy. Journal of Money, Credit and Banking, 41 (8), 1557–1584.CrossRefGoogle Scholar
Ascari, Guido and Sbordone, Argia M. (2014) The macroeconomics of trend inflation. Journal of Economic Literature 52 (3), 679–739.CrossRefGoogle Scholar
Bakhshi, Hasan, Khan, Hashmat, Burriel-Llombart, Pablo, and Rudolf, Barbara (2007) The New Keynesian Phillips curve under trend inflation and strategic complementarity. Journal of Macroeconomics 29 (1), 37–59.CrossRefGoogle Scholar
Ball, Laurence, Mankiw, N. Gregory, and Romer, David (1988) The new Keynesian economics and the output-inflation trade-off. Brookings Papers on Economic Activity 19 (1), 1–65.CrossRefGoogle Scholar
Bullard, James and Mitra, Kaushik (2002) Learning about monetary policy rules. Journal of Monetary Economics 49 (6), 1105–1129 CrossRefGoogle Scholar
Calvo, Guillermo A. (1983) Staggered prices in a utility-maximizing framework. Journal of Monetary Economics 12 (3), 383–398.CrossRefGoogle Scholar
Clarida, Richard, Galí, Jordi, and Gertler, Mark (2000) Monetary policy rules and macroeconomic stability: Evidence and some theory. Quarterly Journal of Economics 115 (1), 147–180.CrossRefGoogle Scholar
Cogley, Timothy and Sbordone, Argia M. (2008) Trend inflation, indexation, and inflation persistence in the New Keynesian Phillips curve. American Economic Review 98 (5), 2101–2126.CrossRefGoogle Scholar
Coibion, Olivier and Gorodnichenko, Yuriy (2011) Monetary policy, trend inflation and the Great Moderation: An alternative interpretation. American Economic Review 101 (1), 341–370.CrossRefGoogle Scholar
Devereux, Michael B. and Yetman, James (2002) Menu costs and the long-run output–inflation trade-off. Economics Letters 76 (1), 95–100.CrossRefGoogle Scholar
Eichenbaum, Martin and Fisher, Jonas D.M. (2007) Estimating the frequency of price re-optimization in Calvo-style models. Journal of Monetary Economics 54 (7), 2032–2047.CrossRefGoogle Scholar
Evans, George W. and Honkapohja, Seppo (2001) Learning and Expectations in Macroeconomics. Princeton, NJ: Princeton University Press.CrossRefGoogle Scholar
Gandolfo, Giancarlo (1997) Economic Dynamics: Study Edition. Berlin: Springer-Verlag.CrossRefGoogle Scholar
Honkapohja, Seppo, Mitra, Kaushik, and Evans, George W. (2011) Notes on Agent's Behavioral Rules under Adaptive Learning and Studies of Monetary Policy. CDMA working paper 11/02, University of St. Andrews.Google Scholar
Hornstein, Andreas and Wolman, Alexander L. (2005) Trend inflation, firm-specific capital, and sticky prices. Federal Reserve Bank of Richmond Economic Quarterly (Fall), 57–83.Google Scholar
Kehoe, Patrick J. and Midrigan, Virgiliu (2015) Prices are sticky after all. Journal of Monetary Economics 75, 35–53.CrossRefGoogle Scholar
Kiley, Michael T. (2000) Endogenous price stickiness and business cycle persistence. Journal of Money, Credit, and Banking 32 (1), 28–53.CrossRefGoogle Scholar
Kiley, Michael T. (2007) Is moderate-to-high inflation inherently unstable? International Journal of Central Banking 3 (2), 173–201.Google Scholar
Kimura, Takeshi and Kurozumi, Takushi (2010) Endogenous nominal rigidities and monetary policy. Journal of Monetary Economics 57 (8), 1038–1048.CrossRefGoogle Scholar
Klenow, Peter J. and Kryvtsov, Oleksiy (2008) State-dependent or time-dependent pricing: Does it matter for recent U.S. inflation? Quarterly Journal of Economics, 123 (3), 863–904.CrossRefGoogle Scholar
Klenow, Peter J. and Malin, Benjamin A. (2010) Microeconomic evidence on price-setting. In Friedman, Benjamin M. and Woodford, Michael (eds.), Handbook of Monetary Economics, Vol. 3, pp. 231–284. Amsterdam: Elsevier, North-Holland.Google Scholar
Kobayashi, Teruyoshi and Muto, Ichiro (2013) A note on expectational stability under nonzero trend inflation. Macroeconomic Dynamics 17 (3), 681–693.CrossRefGoogle Scholar
Kurozumi, Takushi (2006) Determinacy and expectational stability of equilibrium in a monetary sticky-price model with Taylor rule. Journal of Monetary Economics 53 (4), 827–846.CrossRefGoogle Scholar
Kurozumi, Takushi (2014) Trend inflation, sticky prices, and expectational stability. Journal of Economic Dynamics and Control 42, 175–187.CrossRefGoogle Scholar
Kurozumi, Takushi (in press) Endogenous price stickiness, trend inflation, and macroeconomic stability. Journal of Money, Credit and Banking.Google Scholar
Kurozumi, Takushi and Van Zandweghe, Willem (2008) Investment, interest rate policy, and equilibrium stability. Journal of Economic Dynamics and Control 32 (5), 1489–1516.CrossRefGoogle Scholar
Kurozumi, Takushi and Van Zandweghe, Willem (2012) Learning about monetary policy rules when labor market search and matching frictions matter. Journal of Economic Dynamics and Control 36 (4), 523–535.CrossRefGoogle Scholar
Levin, Andrew T., López-Salido, J. David, Nelson, Edward, and Yun, Tack (2008) Macroeconomic equivalence, microeconomic dissonance, and the design of monetary policy. Journal of Monetary Economics 55, S48–S62.CrossRefGoogle Scholar
Levin, Andrew T. and Yun, Tack (2007) Reconsidering the natural rate hypothesis in a New Keynesian framework. Journal of Monetary Economics 54 (5), 1344–1365.CrossRefGoogle Scholar
Lubik, Thomas A. and Schorfheide, Frank (2004) Testing for indeterminacy: An application to U.S. monetary policy. American Economic Review 94 (1), 190–217.CrossRefGoogle Scholar
McCallum, Bennett T. (1983) On non-uniqueness in linear rational expectations models: An attempt at perspective. Journal of Monetary Economics 11 (2), 139–168.CrossRefGoogle Scholar
McCallum, Bennett T. (2007) E-stability vis-a-vis determinacy results for a broad class of linear rational expectations models. Journal of Economic Dynamics and Control 31 (4), 1376–1391.CrossRefGoogle Scholar
Nakamura, Emi and Steinsson, Jon (2008) Five facts about prices: A reevaluation of menu cost models. Quarterly Journal of Economics 123 (4), 1415–1464.CrossRefGoogle Scholar
Romer, David (1990) Staggered price setting with endogenous frequency of adjustment. Economics Letters 32 (3), 205–210.CrossRefGoogle Scholar
Samuelson, Paul A. (1947) Foundations of Economic Analysis. Cambridge, MA: Harvard University Press.Google Scholar
Sbordone, Argia M. (2007) Inflation persistence: Alternative interpretations and policy implications. Journal of Monetary Economics 54 (5), 1311–1339.CrossRefGoogle Scholar
Sveen, Tommy and Weinke, Lutz (2005) New perspectives on capital, sticky prices, and the Taylor principle. Journal of Economic Theory 123 (1), 21–39.CrossRefGoogle Scholar
Sveen, Tommy and Weinke, Lutz (2007) Firm-specific capital, nominal rigidities, and the Taylor principle. Journal of Economic Theory 136 (1), 729–737.CrossRefGoogle Scholar
Taylor, John B. (1980) Aggregate dynamics and staggered contracts. Journal of Political Economy 88 (1), 1–22.CrossRefGoogle Scholar
Taylor, John B. (1993) Discretion versus policy rules in practice. Carnegie–Rochester Conference Series on Public Policy 39 (1), 195–214.CrossRefGoogle Scholar
Woodford, Michael (2003) Interest and Prices. Foundations of a Theory of Monetary Policy. Princeton, NJ: Princeton University Press.Google Scholar
Woodford, Michael (2005) Firm-specific capital and the New Keynesian Phillips curve. International Journal of Central Banking 1 (2), 1–46.Google Scholar