Trend inflation meets macro-finance: the puzzling behavior of price dispersion

Lorant Kaszab, Aleš Maršál and Katrin Rabitsch

Department of Economics Working Papers from Vienna University of Economics and Business, Department of Economics

Abstract: Motivated by recent empirical findings that emphasize low-frequency movements in inflation as a key determinant of term structure, we introduce trend inflation into the workhorse macro-finance model. We show that this compromises the earlier model success and delivers implausible business cycle and bond price dynamics. We document that this result applies more generally to non-linearly solved models with Calvo pricing and trend inflation and is driven by the behavior of price dispersion, which is i) counterfactually high and ii) highly inaccurately approximated. We highlight the channels behind the undesired performance under trend inflation and propose several remedies.

Keywords: trend inflation; Calvo pricing; price dispersion; macro-finance; non-linear solution methods (search for similar items in EconPapers)
JEL-codes: E13 E31 E43 E44 (search for similar items in EconPapers)
Date: 2020-10
New Economics Papers: this item is included in nep-mac
Note: PDF Document
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://epub.wu.ac.at/7809/1/WP304.pdf (application/pdf)

Related works:
Working Paper: Trend inflation meets macro-finance: the puzzling behavior of price dispersion (2020)
Working Paper: Trend Inflation Meets Macro-Finance: The Puzzling Behavior of Price Dispersion (2019)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wiw:wiwwuw:wuwp304

Access Statistics for this paper

More papers in Department of Economics Working Papers from Vienna University of Economics and Business, Department of Economics Welthandelsplatz 1, 1020 Vienna, Austria.
Bibliographic data for series maintained by Department of Economics (economics@wu.ac.at).