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A reevaluation of the macroeconomic effects of positive trend inflation

Salaheddine El Omari

Economics Letters, 2018, vol. 162, issue C, 116-123

Abstract: To date, most of the papers which have examined the effects of trend inflation on the properties of New Keynesian model were based on relatively simple sticky-prices DSGE models and whose realism was sometimes questionable. In this paper, we re-evaluate the macroeconomic effects of non-zero trend inflation. Building on the model of Ascari (2004) as one of the most-cited papers in the literature on the effects of trend inflation, we show that the omission of some important theoretical ingredients significantly distorts the results obtained to date. We propose a refinement of this model by introducing two theoretical important ingredients, namely investment adjustment costs, and a roundabout production structure. Once we add these features to make the model more realistic, as commonly for medium-scale models, we find that the standard New Keynesian model without real frictions overestimates the short-term macroeconomic effects of a positive trend inflation rate and underestimates those of the long term.

Keywords: Re-evaluation; Macroeconomic effects; New Keynesian model; Trend inflation; Short-term proprieties; Long-term proprieties; Real frictions (search for similar items in EconPapers)
Date: 2018
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DOI: 10.1016/j.econlet.2017.11.009

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