The New Keynesian Phillips Curve with Non Zero Steady State Inflation and Entry of Firms

Laurence Bloch

No 2009-03, Working Papers from Center for Research in Economics and Statistics

Abstract: Over the last years, a few authors have assumed a non zero steady state inflation in the derivationof the new Keynesian Phillips curve (NKPC) based on Calvo price setting with staggered prices. This hasled to the theoretical result that the slope of the NKPC decreases with trend inflation, in contrast withstylized facts showing its decline since the 1980s.In this paper, we develop an enlarged NKPC allowing for endogenous entry of firms withpreviously assumed non zero steady state inflation. Pricing complementarities are introduced on thedemand side. This NKPC exhibits the following properties: 1) its slope, though decreasing with the trend ofinflation, also decreases with the trend of the number of varieties; therefore, this NKPC reconciles theorywith stylized facts in an environment of low inflation and globalization; 2) in the long run, real averagemarginal cost and real activity not only decrease with inflation, but also increase with the number ofvarieties; 3) disinflation and deregulation in the product market (a lowering of the entry costs for firms)have complementary effects in the long run: disinflation implies more growth for lower levels of productmarket regulation.

Pages: 31
Date: 2009
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