Trend Inflation and Firms Price-Setting: Rotemberg Versus Calvo


  •  Corresponding author: Guido Ascari, Department of Economics and Quantitative Methods, University of Pavia, Via San Felice 5, 27100 Pavia, Italy. Email:

  • We thank Martin Eichenbaum, Giovanni Lombardo, Rosalba Longhi, Chris Merkl, Tiziano Ropele and participants at the Kiel Institute seminar, the Boston FED Dynare Conference, the CEF 2009 at Sydney, the Bank of Korea-Bank of Canada Joint Conference 2009 in Seoul. Ascari thanks the MIUR for financial support through the PRIN 05 and PRIN 07 programme, grant 2007P8MJ7P. Both authors acknowledge financial support from Alma Mater Ticiniensis Foundation.


We compare the Calvo and Rotemberg price-setting mechanisms in a New Keynesian model with trend inflation. We show that: the long-run relationship between inflation and output is positive in Rotemberg and negative in Calvo; the dynamics of the two models differ even to a first-order approximation; positive trend inflation enlarges the determinacy region in the Rotemberg model, whereas it shrinks it in the Calvo model; the responses of output and inflation to technology shocks are amplified by trend inflation in Calvo, whereas they are dampened in Rotemberg; the two models imply differing non-linear adjustments after a disinflation.