We thank an anonymous referee, Allen Head, André Kurmann, Kevin Moran, and seminar participants at the Bank of Canada and the Journées du CIRPÉE for helpful comments and discussions. The opinions expressed here are those of the authors and not those of the Bank of Canada. The usual caveat applies.
The Macroeconomic Effects of Nonzero Trend Inflation
Article first published online: 13 SEP 2007
Journal of Money, Credit and Banking
Volume 39, Issue 7, pages 1821–1838, October 2007
How to Cite
AMANO, R., AMBLER, S. and REBEI, N. (2007), The Macroeconomic Effects of Nonzero Trend Inflation. Journal of Money, Credit and Banking, 39: 1821–1838. doi: 10.1111/j.1538-4616.2007.00088.x
- Issue published online: 13 SEP 2007
- Article first published online: 13 SEP 2007
- Received March 24, 2006; and accepted in revised form September 20, 2006.
- sticky prices;
- monetary policy;
- inflation targeting
We study the macroeconomic effects of nonzero trend inflation in a simple dynamic stochastic general equilibrium model under three common time-dependent pricing schemes: Calvo, truncated-Calvo, and Taylor. We show that, regardless of the pricing mechanism, trend inflation leads to a reduction in the stochastic means of output, consumption and employment, and an increase in the stochastic mean of inflation beyond its deterministic steady-state level. The variability of most aggregates also increases. These effects are quantitatively much stronger with Calvo pricing.