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Price stickiness, trend inflation, and output dynamics: a cross-country analysis

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  • Hashmat Khan

Abstract

Sticky price models based on menu costs predict that countries with high trend inflation should have (i) smaller impact effects of demand shocks on output and (ii) less persistent output fluctuations, relative to low-trend inflation countries. These predictions are tested, controlling for changes in trend inflation, using a country-specific approach. The results do not support the second prediction. That prediction is also not robust to a modified measure of trend inflation that excludes episodes of hyperinflation. These findings suggest that while price stickiness is important for understanding short-run impact effects, real propagation mechanisms may drive persistence in output fluctuations.

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  • Hashmat Khan, 2004. "Price stickiness, trend inflation, and output dynamics: a cross-country analysis," Canadian Journal of Economics, Canadian Economics Association, vol. 37(4), pages 999-1020, November.
    • Handle: RePEc:cje:issued:v:37:y:2004:i:4:p:999-1020
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    1. Bakhshi, Hasan & Khan, Hashmat & Burriel-Llombart, Pablo & Rudolf, Barbara, 2007. "The New Keynesian Phillips curve under trend inflation and strategic complementarity," Journal of Macroeconomics, Elsevier, vol. 29(1), pages 37-59, March.
    2. Rongrong Sun, 2014. "Nominal rigidity and some new evidence on the New Keynesian theory of the output-inflation tradeoff," International Economics and Economic Policy, Springer, vol. 11(4), pages 575-597, December.

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