Trend inflation and an empirical test of real rigidities

Michal Marenčák

No 323, Department of Economics Working Paper Series from WU Vienna University of Economics and Business

Abstract: Positive trend inflation resolves the observational equivalence of various sources of real rigidities which are first-order equivalent under zero trend inflation. This paper builds on this observation to assess the empirical performance of three widely used types of real rigidities — firm-specific capital, firm-specific wages and a kinked-demand curve — in matching the U.S. inflation dynamics. Firm-specific wages outperform the kinked-demand curve and firm-specific capital in terms of empirical fit. We document that positive trend inflation might reduce the ability of firm-specific factors to prolong the real affects of monetary disturbances.

Keywords: trend inflation; real rigidity; Calvo pricing; price dispersion; monetary policy; inflation persistence (search for similar items in EconPapers)
Date: 2022-05
New Economics Papers: this item is included in nep-cba, nep-dem, nep-mac and nep-mon
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