Positive Trend Inflation in the New Keynesian Model : an analysis considering different forms of state-dependent price-setting frequency and different versions of the Taylor rule
Analyses a New Keynesian model linearised around a possibly positive trend inflation rate. The trend inflation, i.e. target inflation rate, is brought about either by a forward-looking or contemporaneous Taylor rule. Technical analysis of model behaviour and steady-state under the assumption of strategic complementarity in price-setting. Focus on different versions of trend-inflation dependent price-setting frequencies. Like in many other studies, welfare considerations do not justify aninflation target considerably above zero. It appears, however, that higher price-flexibility allows to set a slightly higher target. Overall, price-setting frequency is of considerable importance for the results.
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